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

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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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  • Maria José Salgado & Márcio Gomes Pinto Garcia & Marcelo C. Medeiros, 2001. "Monetary policy during Brazil´s Real Plan: estimating the Central Bank´s reaction function," Textos para discussão 444, Department of Economics PUC-Rio (Brazil).
    • Handle: RePEc:rio:texdis:444
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    1. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 115(1), pages 147-180.
    2. Eitrheim, Oyvind & Terasvirta, Timo, 1996. "Testing the adequacy of smooth transition autoregressive models," Journal of Econometrics, Elsevier, vol. 74(1), pages 59-75, September.
    3. Dolado Juan & Pedrero Ramón María-Dolores & Ruge-Murcia Francisco J., 2004. "Nonlinear Monetary Policy Rules: Some New Evidence for the U.S," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 8(3), pages 1-34, September.
    4. Bec Frédérique & Ben Salem Mélika & Collard Fabrice, 2002. "Asymmetries in Monetary Policy Reaction Function: Evidence for U.S. French and German Central Banks," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 6(2), pages 1-22, July.
    5. Denise R. Osborn & Dong Heon Kim & Marianne Sensier, 2005. "Nonlinearity in the Fed's monetary policy rule," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(5), pages 621-639.
    6. Bennett T. McCallum, 2000. "Alternative monetary policy rules : a comparison with historical settings for the United States, the United Kingdom, and Japan," Economic Quarterly, Federal Reserve Bank of Richmond, issue Win, pages 49-79.
    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.
    8. 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).
    9. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June.
    10. 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.
    11. Dionísio Dias Carneiro & Thomas Yen Hon Wu, 2001. "Contas externas e política monetária," Textos para discussão 442, Department of Economics PUC-Rio (Brazil).
    12. Dolado, Juan J. & Maria-Dolores, Ramon & Naveira, Manuel, 2005. "Are monetary-policy reaction functions asymmetric?: The role of nonlinearity in the Phillips curve," European Economic Review, Elsevier, vol. 49(2), pages 485-503, February.
    13. Laurence H. Meyer & Eric T. Swanson & Volker W. Wieland, 2001. "NAIRU Uncertainty and Nonlinear Policy Rules," American Economic Review, American Economic Association, vol. 91(2), pages 226-231, May.
    14. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
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    1. baaziz, yosra, 2016. "Les règles de Taylor à l’épreuve de la révolution : cas de l’Égypte [The Taylor rule to the test of the revolution: the case of Egypt]," MPRA Paper 69779, University Library of Munich, Germany.
    2. Fred IKLAGA, 2009. "Are Gap Models Policy Consistent? A Quarterly Prediction Model for Monetary Policy In Nigeria," EcoMod2009 21500042, EcoMod.
    3. Edilean Kleber da Silva & Marcelo Savino Portugal, 2010. "Central Bank Preferences And Monetary Rules Under The Inflation Targeting Regime In Brazil," Working Papers 07-2010, Universidade de São Paulo, Faculdade de Economia, Administração e Contabilidade de Ribeirão Preto.
    4. Marco A. F. H. Cavalcanti & Luciano Vereda, 2011. "Propriedades Dinâmicas de Um Modelo DSGE Com Parametrizações Alternativas Para o Brasil," Discussion Papers 1588, Instituto de Pesquisa Econômica Aplicada - IPEA.
    5. Gonçalves, Fernando M & Holland, Marcio & Spacov, Andrei, 2007. "Can Jurisdictional Uncertainty and Capital Controls Explain the High Level of Real Interest Rates in Brazil? Evidence from Panel Data," Revista Brasileira de Economia - RBE, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 61(1), August.
    6. Moreira, Tito Belchior Silva & Souza, Geraldo Silva & Ellery, Roberto, 2013. "An Evaluation of the tolerant to higher inflation rate in the short run by the Brazilian Central Bank in the period 2001-2012," Revista Brasileira de Economia - RBE, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 67(4), November.
    7. Elcyon C. R. Lima & Alexis Maka & Mário Mendonça, 2007. "Monetary Policy Regimes in Brazil," Discussion Papers 1285, Instituto de Pesquisa Econômica Aplicada - IPEA.
    8. Melike Altinkemer, 2005. "Recent Experiences with Capital Controls : Is There A Lesson for Turkey?," Central Bank Review, Research and Monetary Policy Department, Central Bank of the Republic of Turkey, vol. 5(2), pages 1-38.
    9. repec:fgv:epgrbe:v:67:n:4:a:6 is not listed on IDEAS
    10. Mendonça, Mario Jorge & Moreira, Tito Belchior S. & Sachsida, Adolfo, 2021. "Fiscal and monetary policy rules in Brazil: empirical evidence of monetary and fiscal dominance," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), December.
    11. Aragón, Edilean Kleber da Silva Bejarano & Portugal, Marcelo Savino, 2009. "Central Bank preferences and monetary rules under the inflation targeting regime in Brasil," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 29(1), May.
    12. Edilean Kleber da Silva Bejarano Aragón & Marcelo Savino Portugal, 2008. "Nonlinearities in Central Bank of Brazil’s reaction function: the case of asymmetric preferences," Anais do XXXVI Encontro Nacional de Economia [Proceedings of the 36th Brazilian Economics Meeting] 200807151356590, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    13. Knight John & Satchell Stephen, 2011. "Some New Results for Threshold AR(1) Models," Journal of Time Series Econometrics, De Gruyter, vol. 3(2), pages 1-42, April.

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    More about this item

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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