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The Recent Brazilian Disinflation Process and Costs

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  • Alexandre A. Tombini
  • Sergio A. Lago Alves

Abstract

This work revisits the recent disinflation process in Brazil and finds that solely the agents' perception that a policy rupture could occur is capable of triggering a change in the way firms and households used to behave in their pricing and consuming decisions. This change was captured by structural breaks in the parameters of a generalized hybrid Phillips curve, following the 2002 inflation shock. The paper also shows that such parameter changes led to an increase in the disinflation cost evidenced by a free market inflation gain that would have been observed should the coefficients on the Phillips curve have not changed. The paper finds that, maintaining the occurred paths for interest rates, output gap, nominal exchange rates, administered price inflation and exogenous shocks, the free market inflation would have been significantly lower in the absence of such structural break in the underlying inflation process, since mid 2002.

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Bibliographic Info

Paper provided by Central Bank of Brazil, Research Department in its series Working Papers Series with number 109.

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Date of creation: Jun 2006
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Handle: RePEc:bcb:wpaper:109

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Web page: http://www.bcb.gov.br/?english

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References

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  1. Francisco Marcos Rodrigues Figueiredo, 2001. "Evaluating Core Inflation Measures for Brazil," Working Papers Series 14, Central Bank of Brazil, Research Department.
  2. Bonomo, Marco Antônio Cesar & Brito, Ricardo Dias Oliveira, 2001. "Regras Monetárias e Dinâmica Macroeconômica no Brasil: Uma Abordagem de Expectativas Racionais," Economics Working Papers (Ensaios Economicos da EPGE) 410, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil).
  3. José Fajardo & Aquiles Farias, 2002. "Generalized Hyperbolic Distributions and Brazilian Data," Working Papers Series 52, Central Bank of Brazil, Research Department.
  4. Pedro H. Albuquerque, 2001. "Os Impactos Econômicos da CPMF: Teoria e Evidência," Working Papers Series 21, Central Bank of Brazil, Research Department.
  5. Ryan A. Compton & Jose Ricardo da Costa e Silva, 2005. "Finance and the Business Cycle: a Kalman Filter Approach with Markov Switching," Working Papers Series 97, Central Bank of Brazil, Research Department.
  6. Aloisio Araujo & Marcia Leon, 2002. "Speculative Attacks on Debts, Dollarization and Optimum Currency Areas," Working Papers Series 40, Central Bank of Brazil, Research Department.
  7. Emanuel-Werner Kohlscheen, 2000. "Estimating Exchange Market Pressure and Intervention Activity," Working Papers Series 9, Central Bank of Brazil, Research Department.
  8. Pedro H. Albuquerque, 2000. "An Information Theory Approach to the Aggregation of Log-Linear Models," Working Papers Series 4, Central Bank of Brazil, Research Department.
  9. Francisco Marcos R. Figueiredo & Roberta Blass Staub, 2001. "Algumas Considerações Sobre a Sazonalidade no IPCA," Working Papers Series 31, Central Bank of Brazil, Research Department.
  10. Aloisio Araujo & Marcia Leon, 2004. "Speculative Attacks on Debts and Optimum Currency Area: A Welfare Analysis," Working Papers Series 84, Central Bank of Brazil, Research Department.
  11. Eui Jung Chang & Marcelo Kfoury Muinhos & Joanílio Rodolpho Teixeira, 2002. "Macroeconomic Coordination and Inflation Targeting in a Two-Country Model," Working Papers Series 50, Central Bank of Brazil, Research Department.
  12. Leonardo Soriano de Alencar & Márcio I. Nakane, 2003. "Real Balances in the Utility Function: Evidence for Brazil," Working Papers Series 68, Central Bank of Brazil, Research Department.
  13. Victorio Y. T. Chu & Márcio I. Nakane, 2001. "Credit Channel without the LM Curve," Working Papers Series 20, Central Bank of Brazil, Research Department.
  14. Marcelle Chauvet, 2000. "Leading Indicators of Inflation for Brazil," Working Papers Series 7, Central Bank of Brazil, Research Department.
  15. Márcio I. Nakane & Leonardo S. Alencar & Fabio Kanczuk, 2006. "Demand for Bank Services and Market Power in Brazilian Banking," Working Papers Series 107, Central Bank of Brazil, Research Department.
  16. Francisco Marcos R. Figueiredo & Thaís Porto Ferreira, 2002. "Os Preços Administrados e a Inflação no Brasil," Working Papers Series 59, Central Bank of Brazil, Research Department.
  17. Mirta Noemí Sataka Bugarin & Roberto de Goes Ellery Jr. & Victor Gomes Silva & Marcelo Kfoury Muinhos, 2005. "Steady State Analysis of an Open Economy General Equilibrium Model for Brazil," Working Papers Series 92, Central Bank of Brazil, Research Department.
  18. Marcelo Kfoury Muinhos & Sergio Afonso Lago Alves, 2003. "Medium-Size Macroeconomic Model for the Brazilian Economy," Working Papers Series 64, Central Bank of Brazil, Research Department.
  19. Mauro Costa Miranda, 2001. "Crises Cambiais e Ataques Especulativos no Brasil," Working Papers Series 32, Central Bank of Brazil, Research Department.
  20. Benjamin Miranda Tabak & Solange Maria Guerra, 2002. "Stock Returns and Volatility," Working Papers Series 54, Central Bank of Brazil, Research Department.
  21. Sergio Afonso Lago Alves, 2001. "Evaluation of the Central Bank of Brazil Structural Model's Inflation Forecasts in an Inflation Targeting Framework," Working Papers Series 16, Central Bank of Brazil, Research Department.
  22. Thomas Y. Wu, 2004. "Does Inflation Targeting Reduce Inflation? An Analysis for the OECD Industrial Countries," Working Papers Series 83, Central Bank of Brazil, Research Department.
  23. Eduardo Lundberg, 2000. "Monetary Policy and Banking Supervision Functions on the Central Bank," Working Papers Series 2, Central Bank of Brazil, Research Department.
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