Monetary Policy Regimes in Brazil

22 Pages Posted: 16 May 2007

See all articles by Elcyon C.R. Lima

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: May 2007

Abstract

This article estimates the monetary policy rule followed by the Brazilian Central Bank for setting its main policy instrument, the SELIC rate, for the period after the Real Plan. In order to overcome the uncertainty over the dates at which changes in parameters occurred, this paper uses regime-dependent-switching probabilities according to a hidden Markov chain to model possible deviations from a simple linear reaction function.

From July 1996 to January 2006 the Brazilian monetary policy can be fully characterized by four policy regimes. The changes in monetary policy in this period are best described by recurring regime changes, instead of once-and-for-all shifts. We have identified substantial differences in the way monetary policy was conducted in the subperiods before and after 1999, when the Brazilian exchange rate policy regime changed from crawling peg to free-floating. At each of these subperiods there are two recurring regimes and the two regimes of one subperiod differ from the two regimes of the other.

Keywords: Monetary policy rule, regime change, Markov-Switching model

JEL Classification: C22, C51, C52, E52, E58

Suggested Citation

Rocha Lima, Elcyon Caiado and Maka, Alexis and Cardoso Mendonca, Mario Jorge, Monetary Policy Regimes in Brazil (May 2007). Available at SSRN: https://ssrn.com/abstract=986736 or http://dx.doi.org/10.2139/ssrn.986736

Elcyon Caiado Rocha Lima (Contact Author)

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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