Interest rate, exchange rate and the system of inflation target in Brazil

Franklin Serrano

Brazilian Journal of Political Economy, 2010, vol. 30, issue 1, 63-72

Abstract: In the consensus view of the Brazilian system of inflation targeting, the core of inflation is due to demand shocks; the rate of interest is set to control demand; and some variation in the exchange rate happens as “collateral damage”. In this note we argue that in reality core inflation comes from cost push; the interest rate affects the exchange rate; changes in the exchange rate affect costs and prices; it is the effect of interest rates on demand that is the “collateral damage” and that the long run anchor of the system is low average real wage rigidity. JEL Classification: E31; E43; E11.

Keywords: interest rate; exchange rate; inflation target (search for similar items in EconPapers)
Date: 2010
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