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Searching for the Natural Rate of Unemployment in a Large Relative Price Shocks' Economy: the Brazilian Case

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  • Tito Nícias Teixeira da Silva Filho

Abstract

This paper contributes to fill the large existing gap in the literature on the Brazilian natural rate of unemployment. It reveals not only that the correlation between inflation and unemployment has changed radically since the stabilisation of the economy but, more surprisingly, that it has become positive in the recent past. In other words, there has apparently been no trade-off between inflation and unemployment. However, this fact is due to – and highlights – the paramount importance of supply shocks in recent inflation dynamics in Brazil. The paper then shows that the exchange rate has been the major source of shocks to inflation, even though it is not enough to explain the magnitude and persistence of those shocks. Part of the answer comes from the large and wide effects produced by privatisation on the price dynamics in Brazil. The evidence presented here suggests that the Brazilian natural rate of unemployment has been constant since 1996. Despite the high degree of uncertainty involved in natural rate estimations, point estimates seem to lie somewhere between the 7.4%–8.5% range. The paper also sheds light on why real interest rates have been so high for extended periods of time in Brazil, a feature that has puzzled many economists. Finally, it calls to attention that one important core inflation measure in Brazil has not been able to capture underlying inflation properly and, therefore, has to be used with caution.

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File URL: http://www.bcb.gov.br/pec/wps/ingl/wps163.pdf
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Bibliographic Info

Paper provided by Central Bank of Brazil, Research Department in its series Working Papers Series with number 163.

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Date of creation: May 2008
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Handle: RePEc:bcb:wpaper:163

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

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  1. Janine Aron & John Muellbauer & Benjamin Smit, 2004. "A Structural Model of the Inflation Process in South Africa," Development and Comp Systems 0409055, EconWPA.
  2. Laurence Ball & N Gregory Mankiw, 2002. "The NAIRU in Theory and Practice," Economics Working Paper Archive 475, The Johns Hopkins University,Department of Economics.
  3. David Gruen & Adrian Pagan & Christopher Thompson, 1999. "The Phillips Curve in Australia," RBA Research Discussion Papers rdp1999-01, Reserve Bank of Australia.
  4. Jurgen A. Doornik & Henrik Hansen, 2008. "An Omnibus Test for Univariate and Multivariate Normality," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 70(s1), pages 927-939, December.
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Cited by:
  1. Ricardo Schechtman & Wagner Piazza Gaglianone, 2011. "Macro Stress Testing of Credit Risk Focused on the Tails," Working Papers Series 241, Central Bank of Brazil, Research Department.

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