A study on Administered Prices and Optimal Monetary Policy: the Brazilian case

Paulo Springer de Freitas and Mirta Noemi Sataka Bugarin
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Paulo Springer de Freitas: Brazilian Federal Senate and Dept of Economics, University of Brasília, Brazil
Mirta Noemi Sataka Bugarin: Dept of Economics, University of Brasília, Brazil

in Premio de Banca Central Rodrigo Gómez / Central Banking Award "Rodrigo Gómez" from Centro de Estudios Monetarios Latinoamericanos, CEMLA

Abstract: The aim of the present study is to derive and analyse the optimal reaction function of the monetary authority facing different exogenous shocks, given the additional friction introduced into the model economy by administered prices. Since the implementation of the inflation targeting regime in 1999, the Brazilian monetary authority has been facing non trivial challenges imposed by the flexible structure of administered prices. The rigid backward looking pricing rules set forth in the contacts of those administered goods and services leads to a limitation on the effectiveness of monetary policy in the short run. Moreover, the necessary adjustment of relative prices folowing an exogenous shock induces an adjustment of the free sector nominal prices instead of the administered sector prices. According, the optimal response of interest rates, inflation exchange rate and output gap to exogenous shocks to prices and productivity of the controlled sector are analysed in this study.

Keywords: Administered prices; Optimal monetary policy (search for similar items in EconPapers)
JEL-codes: E31 E52 (search for similar items in EconPapers)
Date: 2007
ISBN: 987-607-7734-02-4
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