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Conservatism and rigidity in monetary policy

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  • André de Melo Modenesi

Abstract

This paper aims at evaluating the conduction of monetary policy after the adoption of inflation targeting. Formation of Selic rate is modeled by estimating a reaction function of the BCB. Results show an excessive degree of interest rate smoothing and a high level of equilibrium interest rate. This evidence supports the belief that Selic rate’s formation is ruled by a conservative behavior. The conservative conduction of monetary policy is related to two distinct features of BCB’s reaction function: i) the great weight of autoregressive components; and, chiefly, ii) a very high level of the equilibrium interest rate. The main conclusion is that, all remaining unchanged, the interest rate would hardly be reduced in a satisfactory way. Massive and chronic deflation would be needed if Selic were to reach a reasonable level, closer to that of rates in the rest of the world. This evidences the need for a debate on the adequacy of current stabilization strategy. JEL Classification: E43; E58.

Suggested Citation

  • André de Melo Modenesi, 2011. "Conservatism and rigidity in monetary policy," Brazilian Journal of Political Economy, Center of Political Economy, vol. 31(3), pages 415-434.
    • Handle: RePEc:ekm:repojs:v:31:y:2011:i:3:p:415-434:id:413
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    More about this item

    Keywords

    Taylor rule; Selic; conservatism;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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