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Inflation targeting in Brazil: shocks, backward-looking prices, and IMF conditionality

In: Modelling aspects of the inflation process and the monetary transmission mechanism in emerging market countries

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Author Info

  • Joel Bogdanski

    (Banco Central do Brazil)

  • Paulo Springer de Freitas

    (Banco Central do Brazil)

  • Ilan Goldfajn

    (Banco Central do Brazil)

  • Alexandre Antonio Tombini

    (Banco Central do Brazil)

Abstract

This paper examines the recent evolution of monetary policy since the adoption of formal inflation targeting in Brazil. We argue that the new policy framework has been subject to a severe test in its first years of existence, represented by external shocks – oil prices, and increased international financial volatility. Moreover, we examine some selected issues tha deserve due consideration given their importance to the conduct of monetary policy. The first issue is the presence of a substantial portion of prices with backward-looking adjustment, a fact that affects monetary policy reaction since it reduces the efficiency of domestic interest rates in controlling inflation. The second addresses the question of how inflation targets should be monitored in a country that has an ongoing economic program with the International Monetary Fund. This last issue is particularly important when considering the effects of shortening monitoring horizons on the variability of inflation and output.

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This chapter was published in:

  • Bank for International Settlements, 2001. "Modelling aspects of the inflation process and the monetary transmission mechanism in emerging market countries," BIS Papers, Bank for International Settlements, Bank for International Settlements, number 08, 8.
    This item is provided by Bank for International Settlements in its series BIS Papers chapters with number 08-04.

    Handle: RePEc:bis:bisbpc:08-04

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    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2139, C.E.P.R. Discussion Papers.
    2. Ilan Goldfajn & Sergio R.C. Werlang, 2000. "The pass-through from depreciation to inflation : a panel study," Textos para discussão, Department of Economics PUC-Rio (Brazil) 423, Department of Economics PUC-Rio (Brazil).
    3. Andrew Haldane, 1997. "Some Issues in Inflation Targeting," Bank of England working papers, Bank of England 74, Bank of England.
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    Cited by:
    1. Arminio Fraga & Ilan Goldfajn & André Minella, 2003. "Inflation Targeting in Emerging Market Economies," Working Papers Series, Central Bank of Brazil, Research Department 76, Central Bank of Brazil, Research Department.
    2. Fabio Kanczuk, 2003. "Supply Shocks and Inflation Targeting," Anais do XXXI Encontro Nacional de Economia [Proceedings of the 31th Brazilian Economics Meeting], ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Gr b01, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
    3. Martin Cerisola & Gaston Gelos, 2005. "What Drives Inflation Expectations in Brazil? An Empirical Analysis," IMF Working Papers 05/109, International Monetary Fund.
    4. Ferro, Gustavo, 2007. "Metas de inflación ¿qué hay de nuevo bajo el sol?
      [Inflation Targeting. What's new under the sun?]
      ," MPRA Paper 15069, University Library of Munich, Germany, revised 11 Mar 2008.
    5. Gomez, Miguel I. & Gonzalez, Eliana & Melo, Luis F. & Torres, Jose L., 2006. "Forecasting Food Price Inflation, Challenges for Central Banks in Developing Countries using an Inflation Targeting Framework: the Case of Colombia," 2006 Annual meeting, July 23-26, Long Beach, CA, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association) 21181, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    6. Nogueira Jr., Reginaldo P. & León-Ledesma, Miguel A., 2009. "Fear of Floating in Brazil: Did Inflation Targeting matter?," The North American Journal of Economics and Finance, Elsevier, Elsevier, vol. 20(3), pages 255-266, December.

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