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Endogeneity and nonlinearities in Central Bank of Brazil’s reaction functions: an inverse quantile regression approach

Author

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  • Gabriela Bezerra Medeiros

    () (Universidade Federal da Paraíba (UFPB))

  • Marcelo Savino Portugal

    () (Universidade Federal do Rio Grande do Sul (UFRGS))

  • Edilean Kleber da Silva Bejarano Aragón

    () (Universidade Federal da Paraíba (UFPB))

Abstract

Abstract In this work, we seek to investigate nonlinearities in the reaction function of the Central Bank of Brazil (CBB) by estimating quantile regressions. As the monetary policy rule has endogenous regressors, we use the method of inverse quantile regression, proposed by Chernozhukov and Hansen (Econometrica 73:245–261, 2005). In general, we noted that the linear reaction function properly describes the conduct of monetary policy in normal periods. However, we found that quantile regression estimates allow identifying nonlinearities in the CBB’s policy in periods with large shocks to the inflation rate, output, and exchange rate, as occurred in the exchange rate crisis in 2003 and in the economic crisis in 2008.

Suggested Citation

  • Gabriela Bezerra Medeiros & Marcelo Savino Portugal & Edilean Kleber da Silva Bejarano Aragón, 2017. "Endogeneity and nonlinearities in Central Bank of Brazil’s reaction functions: an inverse quantile regression approach," Empirical Economics, Springer, vol. 53(4), pages 1503-1527, December.
  • Handle: RePEc:spr:empeco:v:53:y:2017:i:4:d:10.1007_s00181-016-1195-0
    DOI: 10.1007/s00181-016-1195-0
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