Monetary policy in Brazil: evidence of a reaction function with time-varying parameters and endogenous regressors

Edilean da Silva Bejarano Aragón () and Gabriela Medeiros ()

Empirical Economics, 2015, vol. 48, issue 2, 557-575

Abstract: This paper estimates a forward-looking reaction function with time-varying parameters to examine changes in the Brazilian monetary policy under the inflation-targeting regime. As the monetary policy rule has endogenous regressors, the conventional Kalman filter cannot be applied. Thus, the two-step procedure proposed by Kim and Nelson (J Monet Econ 53:1949–1966, 2006 ) is used for consistent estimation of the hyper-parameters of the model. The results indicate that the reaction function parameters of the Central Bank of Brazil are time-varying and that the regressors of that function are endogenous. Besides, we observed that: (i) the monetary policy interest rate (Selic rate) responses to current inflation and the inflationary expectations present considerable changes and have diminished with the passing of time; (ii) since mid-2010, policy rule has violated the Taylor principle; (iii) the implicit target for the Selic interest rate has shown a decline over time; and (iv) the degree of interest rate smoothing has shown a relative stability. Finally, the policy instrument response to the output gap presents an increasing trend over the 2010–2011 period. Copyright Springer-Verlag Berlin Heidelberg 2015

Keywords: Forward-looking monetary policy; Time-varying parameter model; Endogeneity; Kalman filter; Brazil; C32; E52; C50 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (4)

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DOI: 10.1007/s00181-013-0791-5

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