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Monetary Policy and Exchange Rate Shocks in Brazil: Sign Restrictions versus A New Hybrid Identification Approach

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  • Lima, Elcyon Caiado Rocha
  • Maka, Alexis
  • Alves, Paloma

Abstract

This paper analyzes the impacts of monetary policy, exchange rate, demand, and supply exogenous disturbances on the Brazilian economy using a structural vector autoregression model identified by two alternative methodologies. The first uses sign restrictions on impulse responses based on an open-economy macroeconomic model. The second (hybrid) is a new methodology that combines the first with restrictions on the contemporaneous causal interrelationships among variables, derived by Directed Acyclic Graphs. A comparison of the results shows that while the effects of exchange rate shocks are nearly the same, the effects of monetary policy shocks depend on the methodology adopted. There is a strong response of the exchange rate to demand shocks and to shocks originating in the foreign exchange market. Exchange rate shocks have an important role in explaining short-run fluctuations of prices and output. We conclude that the exchange rate is an independent source of shocks and a shock absorber.

Suggested Citation

  • Lima, Elcyon Caiado Rocha & Maka, Alexis & Alves, Paloma, 2011. "Monetary Policy and Exchange Rate Shocks in Brazil: Sign Restrictions versus A New Hybrid Identification Approach," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 31(1), March.
    • Handle: RePEc:sbe:breart:v:31:y:2011:i:1:a:3410
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    3. Pérez, Fernando, 2015. "Comparing the Transmission of Monetary Policy Shocks in Latin America: A Hierarchical Panel VAR," Working Papers 2015-015, Banco Central de Reserva del Perú.

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