Measuring Monetary Policy Stance in Brazil

42 Pages Posted: 7 Dec 2005

See all articles by Brisne Vasquez

Brisne Vasquez

Institute of Applied Economic Research (IPEA)

Elcyon C.R. Lima

Institute of Applied Economic Research (IPEA)

Alexis Maka

New York University (NYU) - Department of Economics

Mario Jorge Cardoso Mendonca

Institute of Applied Economic Research (IPEA) - Directory of Macroeconomic Policy & Studies (DIMAC)

Date Written: October 2005

Abstract

In this article we use the theory of conditional forecasts to develop a new Monetary Conditions Index (MCI) for Brazil and compare it to the ones constructed using the methodologies suggested by Bernanke and Mihov (1998) and Batini and Turnbull (2002). We use Sims and Zha (1999) and Waggoner and Zha (1999) approaches to develop and compute Bayesian error bands for the MCIs.

The new indicator we develop is called the Conditional Monetary Conditions Index (CMCI) and is constructed using, alternatively, Structural Vector Autoregressions (SVAR) and Forward-Looking (FL) models. The CMCI is the forecasted output gap, conditioned on observed values of the nominal interest rate (the SELIC rate) and of the real exchange rate. We show that the CMCI, when compared to the MCI developed by Batini and Turnbull (2002), is a better measure of monetary policy stance because it takes into account the endogeneity of variables involved in the analysis.

The CMCI and the Bernanke and Mihov MCI (BMCI), despite conceptual differences, show similarities in their chronology of the stance of monetary policy in Brazil. The CMCI is a smoother version of the BMCI, possibly because the impact of changes in the observed values of the SELIC rate are partially compensated by changes in the value of the real exchange rate. The Brazilian monetary policy, in the 2000:9 - 2005:4 period and according to the last two indicators, has been expansionary near election months.

Note: Downloaded document is in Portuguese

Keywords: Monetary Policy Stance, Conditional Forecasts, Monetary Conditions Index

JEL Classification: E52, E58

Suggested Citation

Vasquez, Brisne and Rocha Lima, Elcyon Caiado and Maka, Alexis and Cardoso Mendonca, Mario Jorge, Measuring Monetary Policy Stance in Brazil (October 2005). Available at SSRN: https://ssrn.com/abstract=867046 or http://dx.doi.org/10.2139/ssrn.867046

Brisne Vasquez (Contact Author)

Institute of Applied Economic Research (IPEA) ( email )

Av. Pres. Antonio Carlos , 51 - 17 andar
Rio de Janeiro, RJ, 20020-010
Brazil
55(21) 23804-8000 (Phone)

Elcyon Caiado Rocha Lima

Institute of Applied Economic Research (IPEA) ( email )

Av. Presidente Antonio Carlos 51
Directory of Macroeconomic Policy and Studies (DIMAC) 15 andar - Centro
RJ 20020-010 Rio de Janeiro
Brazil
+55 21 380-48062 (Phone)
+55 21 240-1920 (Fax)

Alexis Maka

New York University (NYU) - Department of Economics ( email )

269 Mercer Street, 7th Floor
New York, NY 10011
United States

Mario Jorge Cardoso Mendonca

Institute of Applied Economic Research (IPEA) - Directory of Macroeconomic Policy & Studies (DIMAC) ( email )

Av. Presidente Antonio Carlos 51
10 Andar Centro
Rio de Janeiro RJ 20020-010
Brazil

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