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Central Bank Preferences And Monetary Rules Under The Inflation Targeting Regime In Brazil

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  • Edilean Kleber da Silva
  • Marcelo Savino Portugal
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    Abstract

    The estimated interest rate rules are reduced form equations and for that reason they do not directly reveal anything about the structural parameters of monetary policy. In this paper, we seek to further elucidate the Brazilian monetary policy under the inflation targeting regime by calibrating Central Bank preferences. More specifically, we calibrate the policymaker’s loss function by choosing the preference parameter values which minimize the deviation between the optimal and actual paths of the basic interest rate (Selic). Our results indicate that the Central Bank has adopted a flexible inflation target regime and placed some greater weight upon inflation stabilization. We also find out that the monetary authority’s concern with interest rate smoothing has been far deeper than with output stabilization.

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    Bibliographic Info

    Paper provided by Universidade de São Paulo, Faculdade de Economia, Administração e Contabilidade de Ribeirão Preto in its series Working Papers with number 07-2010.

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    Date of creation: 2010
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    Handle: RePEc:fea:wpaper:07-2010

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    Related research

    Keywords: Central Bank preferences; Optimal monetary policy; Inflation target;

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    References

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    1. Tore Ellingsen & Ulf Soderstrom, 2004. "Why are Long Rates Sensitive to Monetary Policy," Working Papers 256, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    2. Carlo A. Favero, . "Macroeconomic stability and the preferences of the Fed. A formal analysis, 1961-98," Working Papers 200, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    3. Stephen Cecchetti & Michael Ehrmann, 2000. "Does Inflation Targeting Increase Output volatility? An International Comparison of Policy Maker's Preferences and Outcomes," Working Papers Central Bank of Chile 69, Central Bank of Chile.
    4. Richard Dennis, 2006. "The policy preferences of the US Federal Reserve," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(1), pages 55-77.
    5. André Minella & Paulo Springer de Freitas & Ilan Goldfajn & Marcelo Kfoury Muinhos, 2002. "Inflation Targeting in Brazil: Lessons and Challenges," Working Papers Series 53, Central Bank of Brazil, Research Department.
    6. Glenn D. Rudebusch & Lars E. O. Svensson, 1998. "Policy Rules for Inflation Targeting," NBER Working Papers 6512, National Bureau of Economic Research, Inc.
    7. Maria José S. Salgado & Márcio G. P. Garcia & Marcelo C. Medeiros, 2005. "Monetary Policy During Brazil´s Real Plan: Estimating the Central Bank´s Reaction Function," Revista Brasileira de Economia, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 59(1), pages 61-80, January.
    8. Marco Antonio Bonomo & Ricardo D. Brito, 2001. "Regras Monetárias e Dinâmica Macroeconômica no Brasil: Uma Abordagem de Expectativas Racionais," Working Papers Series 28, Central Bank of Brazil, Research Department.
    9. Efrem Castelnuovo & Paolo Surico, 2003. "What does Monetary Policy Reveal about a Central Bank's Preferences?," Economic Notes, Banca Monte dei Paschi di Siena SpA, vol. 32(3), pages 335-359, November.
    10. King, Mervyn, 1997. "Changes in UK monetary policy: Rules and discretion in practice," Journal of Monetary Economics, Elsevier, vol. 39(1), pages 81-97, June.
    11. Efrem Castelnuovo & Paolo Surico, 2004. "Model Uncertainty, Optimal Monetary Policy and the Preferences of the Fed," Scottish Journal of Political Economy, Scottish Economic Society, vol. 51(1), pages 105-126, 02.
    12. Sack, Brian & Wieland, Volker, 2000. "Interest-rate smoothing and optimal monetary policy: a review of recent empirical evidence," Journal of Economics and Business, Elsevier, vol. 52(1-2), pages 205-228.
    13. Sean Collins & Pierre L. Siklos, 2004. "Optimal Monetary Policy Rules and Inflation Targets: Are Australia, Canada, and New Zealand Different from the U.S.?," Open Economies Review, Springer, vol. 15(4), pages 347-362, October.
    14. Lars Peter Hansen & Thomas J. Sargent, 1979. "Formulating and estimating dynamic linear rational expectations models," Working Papers 127, Federal Reserve Bank of Minneapolis.
    15. Ozlale, Umit, 2003. "Price stability vs. output stability: tales of federal reserve administrations," Journal of Economic Dynamics and Control, Elsevier, vol. 27(9), pages 1595-1610, July.
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