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Monetary Policy, Inflation and the Level of Economic Activity in Brasil After the Real Plan: Stylized Facts From SVAR Models

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  • Brisne J. V. Céspedes
  • Elcyon C. R. Lima
  • Alexis Maka
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    Abstract

    This article investigates the stochastic and dynamic relationship of a group ofBrazilian macroeconomic variables (price and industrial production indexes, nominalexchange rate, short and medium-run nominal interest rates) for the period after theReal Plan (1996-2004). We adopt, as has become usual in the literature, severalSVAR (structural VAR) models to uncover stylized facts for the short-run impacts ofthe identified exogenous sources of fluctuations of this selected set of variables.A distinctive feature of this article is the employment of Directed Acyclic Graphs(DAG) to obtain the contemporaneous causal order of the variables used to identifythe SVAR models. Another distinguishing characteristic is the careful attention paidto monetary policy developments after the Real Plan when splitting our sample intwo subsamples (1996/07-1998/08 and 1999/03-2004/12).The main results are: a) in response to a positive short run interest rate innovation,during the 1999-2004 subperiod, the output and the price level decrease?however, theoutput response is faster and the price level responds with a lag of near four months; b)for the 1996-1998 subperiod, the most likely effect of a positive short run interest rateinnovation is the reduction of the price level (also with a four months lag), even thoughthere is a large uncertainty in this response, and the reduction of output; c)short runinterest rate innovations are one of the most important sources of temporary fluctuationsin the level of economic activity for both subsamples; and d) exogenous shocks to theexchange rate and to the medium term interest rate are for the 1999-2004 period, themost important sources of inflation rate fluctuation.

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    Bibliographic Info

    Paper provided by Instituto de Pesquisa Econômica Aplicada - IPEA in its series Discussion Papers with number 1101.

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    Length: 34 pages
    Date of creation: Jun 2005
    Date of revision:
    Handle: RePEc:ipe:ipetds:1101

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    1. Uhlig, H.F.H.V.S., 1999. "What are the Effects of Monetary Policy on Output? Results from an Agnostic Identification Procedure," Discussion Paper 1999-28, Tilburg University, Center for Economic Research.
    2. Sims, Christopher A & Uhlig, Harald, 1991. "Understanding Unit Rooters: A Helicopter Tour," Econometrica, Econometric Society, vol. 59(6), pages 1591-99, November.
    3. Lílian Carla dos Reis Arquete & Frederico Gonzaga Jayme Júnior, 2003. "Política Monetária, Preços e Produto no Brasil (1994-2002): uma Aplicação de Vetores Auto-regressivos," Anais do XXXI Encontro Nacional de Economia [Proceedings of the 31th Brazilian Economics Meeting] b45, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
    4. Kadiyala, K. Rao & Karlsson, Sune, 1994. "Numerical Aspects of Bayesian VAR-modeling," Working Paper Series in Economics and Finance 12, Stockholm School of Economics.
    5. Bernanke, Ben S. & Mihov, Ilian, 1995. "Measuring Monetary Policy," Economics Series 10, Institute for Advanced Studies.
    6. James M. Robins, 2003. "Uniform consistency in causal inference," Biometrika, Biometrika Trust, vol. 90(3), pages 491-515, September.
    7. David A. Bessler & Seongpyo Lee, 2002. "Money and prices: U.S. Data 1869-1914 (A study with directed graphs)," Empirical Economics, Springer, vol. 27(3), pages 427-446.
    8. Titus O. Awokuse & David A. Bessler, 2003. "Vector Autoregressions, Policy Analysis, and Directed Acyclic Graphs: An Application to the U.S. Economy," Journal of Applied Economics, Universidad del CEMA, vol. 0, pages 1-24, May.
    9. Hoover, Kevin D., 2005. "Automatic Inference Of The Contemporaneous Causal Order Of A System Of Equations," Econometric Theory, Cambridge University Press, vol. 21(01), pages 69-77, February.
    10. Rothenberg, Thomas J, 1971. "Identification in Parametric Models," Econometrica, Econometric Society, vol. 39(3), pages 577-91, May.
    11. Peter J. Montiel, 1989. "Empirical Analysis of High-Inflation Episodes in Argentina, Brazil, and Israel," IMF Staff Papers, Palgrave Macmillan, vol. 36(3), pages 527-549, September.
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