Can fear beat hope? A story of GARCH-in-Mean-Level effects for Emerging Market Country Risks

Upon winning the 2002 presidential elections, event that considerably increased the Brazilian country risk levels and volatility, Lula celebrated by declaring: “hope has beaten fear”. Extending Une and Portugal (2004), the aim of this paper is twofold: to empirically test the interrelations between country risk conditional mean (“hope”) and conditional variance (“fear”) and cast light on the role of country risk stability in the conduction of macroeconomic policies in developing small open economies. We compare the forecasting performance of various alternative GARCH-in-Mean-Level models for n-step conditional volatility point forecasts of the Brazilian country risk estimated for the period May 1994 - February 2005. The results support the idea that both hope and fear play important roles in the Brazilian case and confirms that hope and fear act in the same direction.nonlinear GARCH, GARCH-in-Mean-Level effect, country risk, fear of disruption, forecast performance

Imperfect Rationality and Inflationary Inertia: A New Estimation of the Phillips Curve for Brazil

This paper presents some new estimates for the relationship between inflation and unemployment in Brazil based on a new Keynesian hypothesis about the behavior of the economy. Four main hypotheses are tested and sustained throughout the study: i) agents do not have perfect rationality; ii) the imperfection in the agents expectations generating process may be an important factor in explaining the high persistence (inertia) of Brazilian inflation; iii) inflation does have an autonomous inertial component, without linkage to shocks in individual markets; iv) a non-linear relationship between inflation and unemployment is able to provide better explanations for the inflation-unemployment relationship in the Brazilian economy in the last 12 years. While the first two hypotheses are tested using a Markov Switching based model of regime changes, the remaining two are tested in a context of a convex Phillips Curve estimated using the Kalman filter. Despite the methodological and estimation improvements provided in the paper, the impulse-response functions for the monetary policy presented the same properties shown in the literature that uses Brazilian dataPhillips Curve; Expectations; Inflation; NAIRU-gap; Markov Switching Models; Kalman Filter; SUR

Testing Nonlinearities Between Brazilian Exchange Rate and Inflation Volatilities

There are few studies directly addressing exchange rate and inflation volatilities, and lack of consensus among them. However, this kind of study is necessary, especially because they can help monetary authorities to know price behavior better. This article analyses the relation between exchange rate and inflation volatilities using a bivariate GARCH model, and therefore modeling conditional volatilities, fact largely unexplored by the literature. We find a semi-concave relation between those series, and this nonlinearity may explain their apparently disconnection under a floating exchange rate system. The article also shows that traditional tests, with non-conditional volatilities, are not robust.

EQUILIBRIUM MODELS OF TRADE EQUATIONS: A CRITICAL REVIEW

In this paper we review the theoretical literature on trade equation models, including the production theory approach. We discuss several empirical problems commonly found in the applied work and the available literature on Brazilian trade equations.Neste artigo, revisa-se a literatura teórica sobre equações de comércio exterior, inclusive o modelo de comércio baseado na teoria da produção. Discute-se vários problemas comumente encontrados em trabalhos empíricos e também a literatura existente sobre equações relativas ao comércio exterior brasileiro

Monetary and fiscal policy interactions in Brazil: an application of the fiscal theory of the price level

The aim of the present paper is to verify the predominance of a monetary or fiscal dominance regime in Brazil in the post-Real period. The analysis is based on a model proposed by Canzoneri, Cumby and Diba (2000). This model proposes that there is a relationship between the public debt/GDP and primary surplus/GDP series by using the vector autoregression (VAR) framework and analyzing the impulse response functions. Another aim is the extension of the article written by Muscatelli et al. (2002) about the interactions between monetary and fiscal policies using the Markov-switching vector autoregressive model (MS-VAR) introduced by Krolzig (1997), since the relationship between these policies may not be constant over time. In conclusion, the macroeconomic coordination between monetary and fiscal policies in Brazil was virtually a substitute policy throughout the study period, with a predominantly monetary regime, in opposition to the non-Ricardian policies of the Fiscal Theory of The Price Level.O objetivo do presente artigo é verificar a existência de um regime de dominância monetária ou fiscal no Brasil no período pós-Plano Real. A análise é baseada em um modelo proposto por Canzoneri, Cumby e Diba (2000). O procedimento modela relação entre as séries de dívida publica/PIB e superávit primário/PIB usando um do vetor auto-regressivo (VAR) e analisa as funções de impulso-resposta. Um outro objetivo é a extensão do artigo escrito por Muscatelli et al. (2002) sobre as interações entre políticas monetária e fiscal, usando agora o modelo do vetor auto-regressivo com mudanças de markov (MS-VAR) introduzido por Krolzig (1997), uma vez que a relação entre essas políticas pode não ser constante ao longo do tempo. A conclusão mostra que a coordenação macroeconômica entre políticas monetária e fiscal no Brasil foi virtualmente uma política substituta durante o período estudado, com um regime monetário predominante em oposição às políticas não-ricardianas da Teoria Fiscal do Nível de Preços

BUSINESS CYCLE IN THE INDUSTRIAL PRODUCTION OF BRAZILIAN STATES

Este artigo aplica o modelo de Mudanças Markovianas com o propósito de verificar duas características da produção industrial de seis importantes estados brasileiros. Primeiramente, nós tentamos determinar os períodos dos ciclos de negócio e, logo depois, nós verificamos a existência ou não de um componente não observável que é comum a todas as séries de 1980 a 2001. As características desse comovimento são verificadas através de modelos multivariados. Os resultados das estimativas univariadas nos permitem inferir sobre a existência de um comportamento similar entre a produção industrial dos estados do sudeste e dos estados do sul. O modelo multivariado eficientemente captura o comportamento cíclico da produção industrial quando usado regionalmente, então revelando uma dinâmica para os períodos de crescimento e recessão, que difere entre essas duas regiões.The present paper applies the Markov switching model with the aim of checking two industrial production features of six major Brazilian states. Firstly, we try to determine the date of business cycles and, soon afterwards, we verify the existence or not of an unobservable component that is common to all series from 1980 to 2001. The characteristics of this comovement are checked by multivariate models. The results from the univariate estimates allow us to infer about the existence of a similar behavior between the industrial production of the southeastern states and that observed in the southern states. The multivariate model efficiently captures the cyclic behavior of industrial production when used regionally, thus revealing a dynamics for growth and recession periods, which differs between these two regions