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Monetary policy during Brazil´s Real Plan: estimating the Central Bank´s reaction function

This paper uses a Threshold Autoregressive (TAR) model with exogenous variables to explain a change in regime in Brazilian nominal interest rates. By using an indicator of currency crises -which is chosen endogenously - the model tries to explain the difference in the dynamics of nominal interest rates during and out of a currency crises. The paper then compares the performance of the nonlinear model to a modified Taylor Rule adjusted to Brazilian interest rates, and shows that the former performs considerably better than the latter.

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File URL: http://www.econ.puc-rio.br/pdf/td444.pdf
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Paper provided by Department of Economics PUC-Rio (Brazil) in its series Textos para discussão with number 444.

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Length: 17 pages
Date of creation: Sep 2001
Date of revision:
Publication status: Published in Revista Brasileira de Economia,v. 59, p. 61-79, 2005
Handle: RePEc:rio:texdis:444
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  1. Márcio gomes Pinto Garcia & Marcus Vinicius Ferrero Valpassos, 1998. "Capital flows, capital controls and currency crisis: the case of Brazil in the nineties," Textos para discussão 389, Department of Economics PUC-Rio (Brazil).
  2. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
  3. Clarida, R. & Gali, J. & Gertler, M., 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and some Theory," Working Papers 98-01, C.V. Starr Center for Applied Economics, New York University.
  4. Dolado, Juan José & Ruge Murcia, F. J. & Ramón, Maria Dolores, 2002. "Nonlinear monetary policy rules: some new evidence for the US," UC3M Working papers. Economics we022910, Universidad Carlos III de Madrid. Departamento de Economía.
  5. Eitrheim, Øyvind & Teräsvirta, Timo, 1995. "Testing the Adequacy of Smooth Transition Autoregressive Models," SSE/EFI Working Paper Series in Economics and Finance 56, Stockholm School of Economics.
  6. Dionísio Dias Carneiro & Thomas Yen Hon Wu, 2001. "Contas externas e política monetária," Textos para discussão 442, Department of Economics PUC-Rio (Brazil).
  7. Nobay, A. R. & Peel, D. A., 2000. "Optimal monetary policy with a nonlinear Phillips curve," Economics Letters, Elsevier, vol. 67(2), pages 159-164, May.
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