AN EVALUATION OF MONETARY POLICY IN EXCHANGE RATE AND INFLATION TARGETING REGIMES

Abstract

In this paper, we evaluate the macroeconomic performance of monetary
policy conduction under the crawling peg (CP) and inflation targeting (IT) in Brazil, both
implemented after the Real Plan. In order to do so, we estimate several autoregressive (VAR)
regressions with monthly data in the 1995-2014 period. Our findings show that during the
crawling peg system (1995 to June-1999), the monetary authority was not able to affect
inflation in the country. Interest rate innovations had no significant impacts on prices, and
highly recessive effects on output. After the inflation targeting implementation (July-1999
to 2014), we verify that policy rate shocks reduced output, consumer prices inflation, and inflation expectations. However, between 2010 and 2014 specifically, monetary policy
lost much of its effectiveness. Thus, we conclude that inflation targeting has improved the
outcomes of monetary policy in Brazil, but such result depends crucially on the commitment
of the Central Bank with the fundamentals of this framework.