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Monetary Transmission in an Emerging Targeter: The Case of Brazil

  • A. R. Pagan
  • Douglas Laxton
  • Luis Catão

This paper lays out a structural model that incorporates key features of monetary transmission in typical emerging-market economies, including a bank-credit channel and the role of external debt accumulation on country risk premia and exchange rate dynamics. We use an SVAR representation of the model to study the monetary transmission in Brazil. We find that interest rate changes have swifter effects on output and inflation compared to advanced economies and that exchange rate dynamics plays a key role in this connection. Importantly, the response of inflation to monetary policy shocks has grown stronger and the output-inflation tradeoff improved since the introduction of inflation targeting.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 08/191.

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Length: 42
Date of creation: 01 Aug 2008
Date of revision:
Handle: RePEc:imf:imfwpa:08/191
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  1. Catao, Luis A.V. & Terrones, Marco E., 2005. "Fiscal deficits and inflation," Journal of Monetary Economics, Elsevier, vol. 52(3), pages 529-554, April.
  2. Corbo, Vittorio & Landerretche, Oscar & Schmidt-Hebbel, Klaus, 2001. "Assessing Inflation Targeting after a Decade of World Experience," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 6(4), pages 343-68, October.
  3. Favero, Carlo A. & Giavazzi, Francesco, 2004. "Inflation Targeting and Debt: Lessons from Brazil," CEPR Discussion Papers 4376, C.E.P.R. Discussion Papers.
  4. Schmitt-Grohé, Stephanie & Uribe, Martín, 2002. "Closing Small Open Economy Models," CEPR Discussion Papers 3096, C.E.P.R. Discussion Papers.
  5. André Minella & Paulo Springer de Freitas & Ilan Goldfajn & Marcelo Kfoury Muinhos, 2003. "Inflation Targeting in Brazil: Constructing Credibility under Exchange Rate Volatility," Working Papers Series 77, Central Bank of Brazil, Research Department.
  6. Marvin Goodfriend & Bennett T. McCallum, 2007. "Banking and interest rates in monetary policy analysis: a quantitative exploration," Proceedings, Federal Reserve Bank of San Francisco.
  7. Miguel A. Savastano & Paul R. Masson & Sunil Sharma, 1997. "The Scope for Inflation Targeting in Developing Countries," IMF Working Papers 97/130, International Monetary Fund.
  8. Svensson, Lars E.O., 1998. "Open-Economy Inflation Targeting," Seminar Papers 638, Stockholm University, Institute for International Economic Studies.
  9. MINELLA André & DE FREITAS Paulo Springer & GOLDFAJN Ilan & KFOURY MUINHOS Marcelo, . "Inflation Targeting in Brazil: Constructing Credibility under Exchange Rate Volatility," EcoMod2003 330700103, EcoMod.
  10. André Minella, 2001. "Monetary Policy and Inflation in Brazil (1975-2000): a VAR Estimation," Working Papers Series 33, Central Bank of Brazil, Research Department.
  11. Alexandre A. Tombini & Sergio A. Lago Alves, 2006. "The Recent Brazilian Disinflation Process and Costs," Working Papers Series 109, Central Bank of Brazil, Research Department.
  12. Arminio Fraga & Ilan Goldfajn & André Minella, 2003. "Inflation Targeting in Emerging Market Economies," Working Papers Series 76, Central Bank of Brazil, Research Department.
  13. Heather M. Anderson & Chin Nam Low & Ralph Snyder, 2004. "Single Source of Error State Space Approach to the Beveridge Nelson Decomposition," Monash Econometrics and Business Statistics Working Papers 21/04, Monash University, Department of Econometrics and Business Statistics.
  14. Bernanke, Ben S & Blinder, Alan S, 1988. "Credit, Money, and Aggregate Demand," American Economic Review, American Economic Association, vol. 78(2), pages 435-39, May.
  15. Vladimir Klyuev & Heesun Kiem & Ondra Kamenik & Douglas Laxton, 2008. "Why is Canada’s Price Level So Predictable?," IMF Working Papers 08/25, International Monetary Fund.
  16. Bonomo, Marco & Martins, Betina & Pinto, Rodrigo, 2003. "Debt composition and exchange rate balance sheet effect in Brazil: a firm level analysis," Emerging Markets Review, Elsevier, vol. 4(4), pages 368-396, December.
  17. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fear of Floating," NBER Working Papers 7993, National Bureau of Economic Research, Inc.
  18. Edwards, Sebastian & Vegh, Carlos A., 1997. "Banks and macroeconomic disturbances under predetermined exchange rates," Journal of Monetary Economics, Elsevier, vol. 40(2), pages 239-278, October.
  19. Ignazio Angeloni & Anil K. Kashyap & Benoît Mojon & Daniele Terlizzese, 2003. "The output composition puzzle: a difference in the monetary transmission mechanism in the euro area and United States," Proceedings, Federal Reserve Bank of Cleveland, pages 1265-1317.
  20. Luis F. Céspedes & Claudio Soto, 2005. "Credibility and Inflation Targeting in an Emerging Market: Lessons from the Chilean Experience," International Finance, Wiley Blackwell, vol. 8(3), pages 545-575, December.
  21. Guillermo A. Calvo & Alejandro Izquierdo & Luis Fernando Mejía, 2004. "On the Empirics of Sudden Stops: The Relevance of Balance-Sheet Effects," IDB Publications (Working Papers) 6516, Inter-American Development Bank.
  22. Afonso S. Bevilaqua & Mário Mesquita & André Minella, 2007. "Brazil: taming inflation expectations," Working Papers Series 129, Central Bank of Brazil, Research Department.
    • Afonso S Bevilaqua & Mário Mesquita & André Minella, 2008. "Brazil: taming inflation expectations," BIS Papers chapters, in: Bank for International Settlements (ed.), Transmission mechanisms for monetary policy in emerging market economies, volume 35, pages 139-158 Bank for International Settlements.
  23. José De Gregorio & Andrea Tokman & Rodrigo Valdés, 2005. "Flexible Exchange Rate with Inflation Targeting in Chile: Experience and Issues," Research Department Publications 4427, Inter-American Development Bank, Research Department.
  24. Dungey, Mardi & Pagan, Adrian, 2000. "A Structural VAR Model of the Australian Economy," The Economic Record, The Economic Society of Australia, vol. 76(235), pages 321-42, December.
  25. Minella, André, 2003. "Monetary Policy and Inflation in Brazil (1975-2000): A VAR Estimation," Revista Brasileira de Economia, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 57(3), July.
  26. Norman Loayza & Raimundo Soto, 2002. "Inflation Targeting: An Overview," Central Banking, Analysis, and Economic Policies Book Series, in: Norman Loayza & Raimundo Soto & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Editor) (ed.), Inflation Targeting: Desing, Performance, Challenges, edition 1, volume 5, chapter 1, pages 001-022 Central Bank of Chile.
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