Monetary Policy, Inflation and the Level of Economic Activity in Brasil After the Real Plan: Stylized Facts From SVAR Models

Abstract

This article investigates the stochastic and dynamic relationship of a group ofBrazilian macroeconomic variables (price and industrial production indexes, nominalexchange rate, short and medium-run nominal interest rates) for the period after theReal Plan (1996-2004). We adopt, as has become usual in the literature, severalSVAR (structural VAR) models to uncover stylized facts for the short-run impacts ofthe identified exogenous sources of fluctuations of this selected set of variables.A distinctive feature of this article is the employment of Directed Acyclic Graphs(DAG) to obtain the contemporaneous causal order of the variables used to identifythe SVAR models. Another distinguishing characteristic is the careful attention paidto monetary policy developments after the Real Plan when splitting our sample intwo subsamples (1996/07-1998/08 and 1999/03-2004/12).The main results are: a) in response to a positive short run interest rate innovation,during the 1999-2004 subperiod, the output and the price level decrease?however, theoutput response is faster and the price level responds with a lag of near four months; b)for the 1996-1998 subperiod, the most likely effect of a positive short run interest rateinnovation is the reduction of the price level (also with a four months lag), even thoughthere is a large uncertainty in this response, and the reduction of output; c)short runinterest rate innovations are one of the most important sources of temporary fluctuationsin the level of economic activity for both subsamples; and d) exogenous shocks to theexchange rate and to the medium term interest rate are for the 1999-2004 period, themost important sources of inflation rate fluctuation.