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Inflation targeting in Brazil: shocks, backward-looking prices and IMF conditionality

In: Market functioning and central bank policy

  • Joel Bogdanski

    (Central Bank of Brazil)

  • Paulo Springer de Freitas

    (Central Bank of Brazil)

  • Ilan Goldfajn

    (Central Bank of Brazil)

  • Alexandre Tombini

    (Central Bank of Brazil)

This paper examines the recent evolution of monetary policy since the adoption of formal inflation targeting in Brazil. We argue that the new policy framework has been subject to a severe test in its first years of existence, represented by external shocks – oil prices, and increased international financial volatility. Moreover, we examine some selected issues tha deserve due consideration given their importance to the conduct of monetary policy. The first issue is the presence of a substantial portion of prices with backward-looking adjustment, a fact that affects monetary policy reaction since it reduces the efficiency of domestic interest rates in controlling inflation. The second addresses the question of how inflation targets should be monitored in a country that has an ongoing economic program with the International Monetary Fund. This last issue is particularly important when considering the effects of shortening monitoring horizons on the variability of inflation and output.

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This chapter was published in:
  • Bank for International Settlements, 2002. "Market functioning and central bank policy," BIS Papers, Bank for International Settlements, number 12, April.
  • This item is provided by Bank for International Settlements in its series BIS Papers chapters with number 12-17.
    Handle: RePEc:bis:bisbpc:12-17
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    1. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," NBER Working Papers 7147, National Bureau of Economic Research, Inc.
    2. Ilan Goldfajn & Sergio R.C. Werlang, 2000. "The pass-through from depreciation to inflation : a panel study," Textos para discussão 423, Department of Economics PUC-Rio (Brazil).
    3. Andrew Haldane, 1997. "Some Issues in Inflation Targeting," Bank of England working papers 74, Bank of England.
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