IDEAS home Printed from
   My bibliography  Save this paper

Robustness and Stabilization Properties of Monetary Policy Rules in Brazil


  • Ajax R. B. Moreira
  • Marco A. F. H. Cavalcanti


Based on three versions of a small macroeconomic model for Brazil, this paper presents empirical evidence on the effects of parameter uncertainty on monetary policy rules and on the robustness of optimal and simple rules over different model specifications. By comparing the optimal policy rule under parameter uncertainty with the rule calculated under purely additive uncertainty, we find that parameter uncertainty should make policymakers react less aggressively to the economy’s state variables, as suggested by Brainard’s “conservatism principle”, although this effect seems to be relatively small. We then informally investigate each rule’s robustness by analyzing the performance of policy rules derived from each model under each one of the alternative models. We find that optimal rules derived from each model perform very poorly under alternative models, whereas a simple Taylor rule is relatively robust. We also find that even within a specific model, the Taylor rule may perform better than the optimal rule under particularly unfavorable realizations from the policymaker’s loss distribution function. Este texto analisa a robustez e as propriedades de estabilização de regras de política monetária no contexto de um pequeno modelo macroeconométrico para o Brasil. Estimam-se três versões do modelo “padrão” da literatura recente sobre regras de política monetária. Em cada caso, a regra ótima de política é calculada sob incerteza puramente aditiva e sob incerteza multiplicativa. Observa-se que a incerteza sobre os parâmetros do modelo atenua os coeficientes da função de reação ótima das autoridades, conforme sugerido pelo “princípio do conservadorismo” de Brainard — ainda que esse efeito seja relativamente pequeno. A robustez das regras de política é investigada informalmente por intermédio da análise do desempenho da regra ótima de cada modelo no contexto de cada um dos modelos alternativos. Os resultados mostram que as regras ótimas derivadas de um modelo específico tendem a apresentar desempenho muito fraco sob os demais modelos, em contraste com uma regra de Taylor simples, que se revela relativamente robusta. Finalmente, mostra-se que, mesmo no contexto de um modelo específico, a regra de Taylor pode ter desempenho superior à regra ótima, sob realizações particularmente desfavoráveis da distribuição de probabilidade da função de perda das autoridades.

Suggested Citation

  • Ajax R. B. Moreira & Marco A. F. H. Cavalcanti, 2015. "Robustness and Stabilization Properties of Monetary Policy Rules in Brazil," Discussion Papers 0100, Instituto de Pesquisa Econômica Aplicada - IPEA.
  • Handle: RePEc:ipe:ipetds:0100

    Download full text from publisher

    File URL:
    Download Restriction: no

    References listed on IDEAS

    1. Svensson, Lars E. O., 1997. "Inflation forecast targeting: Implementing and monitoring inflation targets," European Economic Review, Elsevier, vol. 41(6), pages 1111-1146, June.
    2. Swanson, Eric T., 2004. "Signal Extraction And Non-Certainty-Equivalence In Optimal Monetary Policy Rules," Macroeconomic Dynamics, Cambridge University Press, vol. 8(01), pages 27-50, February.
    3. Svensson, Lars E. O. & Woodford, Michael, 2003. "Indicator variables for optimal policy," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 691-720, April.
    4. Ben Martin & Chris Salmon, 1999. "Should uncertain monetary policy-makers do less?," Bank of England working papers 99, Bank of England.
    5. CHADHA, Jagjit & SCHELLEKENS, Philip, "undated". "Monetary policy loss functions: two cheers for the quadratic," Working Papers 1999002, University of Antwerp, Faculty of Business and Economics.
    6. Arturo Estrella & Frederic S. Mishkin, 1999. "Rethinking the Role of NAIRU in Monetary Policy: Implications of Model Formulation and Uncertainty," NBER Chapters,in: Monetary Policy Rules, pages 405-436 National Bureau of Economic Research, Inc.
    7. Joaquim Pinto de Andrade & José Angelo C. A. Divino, 2015. "Optimal Rules for Monetary Policy in Brazil," Discussion Papers 0101, Instituto de Pesquisa Econômica Aplicada - IPEA.
    8. Glenn Rudebusch & Lars E.O. Svensson, 1999. "Policy Rules for Inflation Targeting," NBER Chapters,in: Monetary Policy Rules, pages 203-262 National Bureau of Economic Research, Inc.
    9. Ball, Laurence, 1999. "Efficient Rules for Monetary Policy," International Finance, Wiley Blackwell, vol. 2(1), pages 63-83, April.
    10. Frank Smets, 2002. "Output gap uncertainty: Does it matter for the Taylor rule?," Empirical Economics, Springer, vol. 27(1), pages 113-129.
    11. Orphanides, Athanasios, 2003. "Monetary policy evaluation with noisy information," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 605-631, April.
    12. Drew, Aaron & Hunt, Benjamin, 2000. "Efficient simple policy rules and the implications of potential output uncertainty," Journal of Economics and Business, Elsevier, vol. 52(1-2), pages 143-160.
    13. Geoffrey Shuetrim & Christopher Thompson, 2003. "The Implications of Uncertainty for Monetary Policy," The Economic Record, The Economic Society of Australia, vol. 79(246), pages 370-379, September.
    14. Peersman, Gert & Smets, Frank, 1999. "The Taylor Rule: A Useful Monetary Policy Benchmark for the Euro Area?," International Finance, Wiley Blackwell, vol. 2(1), pages 85-116, April.
    15. Brian P. Sack, 1998. "Does the Fed act gradually? a VAR analysis," Finance and Economics Discussion Series 1998-17, Board of Governors of the Federal Reserve System (US).
    16. Svensson, Lars E. O. & Woodford, Michael, 2003. "Indicator variables for optimal policy," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 691-720, April.
    17. Simon Hall & Chris Salmon & Tony Yates & Nicoletta Batini, 1999. "Uncertainty and Simple Monetary Policy Rules - An illustration for the United Kingdom," Bank of England working papers 96, Bank of England.
    Full references (including those not matched with items on IDEAS)

    More about this item

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ipe:ipetds:0100. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Fabio Schiavinatto). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.