INFLATION, UNEMPLOYMENT AND EXCHANGE RATE SHOCKS: A VAR ESTIMATION FOR THE BRAZILIAN ECONOMY

Abstract

This paper estimates a VAR model representing the new-Keynesian Phillips curve with exchange rate shocks for the Brazilian economy. The unemployment rate from the PME survey is our proxy for the marginal cost, inflation is measured by the CPI, and expectations were obtained from the Central Bank survey with the financial market. The empirical findings may be summed up in the following: a) the exchange rate pass-through is around 0.04 p.p. to the next month inflation (above 0.4 p.p. in the annualized rate) after an exogenous variation of R$ 0,01 in the dollar price, but this effect is insignificant; b) a shock on the unemployment rate lasts abound 18 months; c) an innovation of 0,06 p.p. on expectations is carried to inflation which is increased by 0,05 p.p. in the month following the shock (0.6 p.p. over the annualized inflation); and d) a shock on the inflation rate has no effect over the unemployment rate, that is, more inflation does not reduce unemployment.