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Using a Money Demand Model to Evaluate Monetary Policies in Brazil

Listed author(s):
  • Pedro H. Albuquerque
  • Solange Gouvea

This paper uses a money demand model to evaluate monetary policies under different regimes in Brazil. The consistency between monetary liquidity and the inflation rate path is considered. The concept is applied to the Brazilian case by modeling M 1 and its components. Based on unit root and cointegration tests, a growth-rate model is chosen, which considers all the interventions that happened during the sample period (1980-1999). It is shown that a variable seasonal pattern, which is a linear function of the nominal interest rate, increases the model ability to explain seasonal changes in the money demand. Despite the economic instability that marked Brazilian economic history during the last two decades, the model shows good fit and predictive power. Finally, it is shown that unsuccessful macroeconomic stabilization programs were marked by excessive liquidity, with money supply exceeding expected conditional money demand during intervention periods. The results suggest that to track monetary aggregates can be useful to policy makers even under a regime where interest rates are the main policy instrument.

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Paper provided by Central Bank of Brazil, Research Department in its series Working Papers Series with number 29.

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Date of creation: Nov 2001
Handle: RePEc:bcb:wpaper:29
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