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Inflation targeting in Brazil: constructing credibility under exchange rate volatility

  • Minella, Andre
  • de Freitas, Paulo Springer
  • Goldfajn, Ilan
  • Muinhos, Marcelo Kfoury

This paper assesses the challenges faced by the inflation-targeting regime in Brazil. The confidence crisis in the future performance of the Brazilian economy and the increase in risk aversion in international markets were responsible for a sudden stop of capital inflows in 2002 that caused a significant depreciation of the exchange rate. The inflation-targeting framework has played a critical role in macroeconomic stabilization. We stress two important challenges: construction of credibility and exchange rate volatility. The estimations indicate the following results: i) the inflation targets have worked as an important coordinator of expectations; ii) the Central Bank has reacted strongly to inflation expectations; iii) there has been a reduction in the degree of inflation persistence; and iv) the exchange rate pass-through for "administered or monitored" prices is two times higher than for "market" prices.

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Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 22 (2003)
Issue (Month): 7 (December)
Pages: 1015-1040

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Handle: RePEc:eee:jimfin:v:22:y:2003:i:7:p:1015-1040
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

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