An analysis of nonlinearity of the Brazilian Central Bank reaction function

Jose Rossi and Terence Pagano

Applied Financial Economics, 2013, vol. 23, issue 10, 837-845

Abstract: This article examines whether the Central Bank of Brazil's (BCB) reaction function has nonlinear properties and characterizes the type of preference of the BCB from July 2000 to August 2008. The tests reject the hypothesis of linearity in the BCB's reaction function. Furthermore, using a smooth-transition regression model, the results indicate that the BCB reacted more strongly in reducing interest rates when expected inflation was below target, than when it was above, which is consistent with the presence of recession avoidance preferences. Despite this, the results indicate that most of the time, the BCB respected the Taylor principle, strongly responding to changes in the expected inflation.

Date: 2013
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DOI: 10.1080/09603107.2013.767978

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