Helder Ferreira de Mendonça

Towards credibility from inflation targeting: the Brazilian experience

This article analyses the use of the basic interest rate after the adoption of inflation targeting in Brazil and the credibility of this monetary regime through two indices that consider the Cukierman and Meltzer (1986) definition for credibility. It also shows the main theoretical and practical motives for changes in the conduction of the monetary policy in the 1970s; the way that inflation targeting strategy is inserted in rules vs. discretion analysis; and the main points that characterize the literature concerning inflation targeting. The findings denote that the strategy implemented in Brazil is not a good mechanism to develop credibility.This article analyses the use of the basic interest rate after the adoption of inflation targeting in Brazil and the credibility of this monetary regime through two indices that consider the Cukierman and Meltzer (1986) definition for credibility. It also shows the main theoretical and practical motives for changes in the conduction of the monetary policy in the 1970s; the way that inflation targeting strategy is inserted in rules vs. discretion analysis; and the main points that characterize the literature concerning inflation targeting. The findings denote that the strategy implemented in Brazil is not a good mechanism to develop credibility.

Economic transparency and effectiveness of monetary policy

Purpose - The purpose of this paper is to study if the central bank (BC) communications affect the effectiveness of the monetary policy. Design/methodology/approach - For this analysis, a new Keynesian theoretical model and the ordinary least squared methodology were used. The objective to be achieved was to determine if there is some effect of economic transparency on accountability, inflation average, output gap, interest and central bank credibility. Findings - The results highlighted that central banks with greater transparency contribute to decrease inflation rate and interest rate. The findings denote that an increase in the information quality (clarity) implies a significant change in the rate of readjustment of market expectations. Furthermore, central bank transparency contributes to anchor the public expectations and to affect long-run interest rates. Research limitations/implications - Impulse-answer research was employed to show how the central bank transparency affects the credibility of monetary authorities. Practical implications - This paper suggests that the central bank publicizes its outlook, its policy monetary decisions, its expectations and its preferences. Originality/value - The originality of the paper resides in the fact that empirical and theoretical studies were made in the single work. Also, new results were found denoting that economic transparency reduces uncertainty effect and increases the power of incentive contract made between the BC and public.

Empirical evidence from fourteen countries with explicit inflation targeting

This article attempts to contribute to the empirical research on inflation targeting (IT) making an inquiry of the relation between macroeconomic variables for 14 countries with explicit IT. The main results denote that the adoption of IT is a good framework for reducing inflation, and thus contributes to diminish interest rate without apparent costs on economic growth, although unemployment increases.This article attempts to contribute to the empirical research on inflation targeting (IT) making an inquiry of the relation between macroeconomic variables for 14 countries with explicit IT. The main results denote that the adoption of IT is a good framework for reducing inflation, and thus contributes to diminish interest rate without apparent costs on economic growth, although unemployment increases.

Output‐inflation and unemployment‐inflation trade‐offs under inflation targeting: Evidence from Brazil

Purpose - This article aims to analyze if the adoption of inflation targeting in Brazil contributed to an improvement in the conduction of monetary policy capable of increasing credibility and reducing inflation without an increase in the sacrifice rate. Design/methodology/approach - Considering the Brazilian experience, this article estimates, through GMM and VAR methods, the offsetting effects of a monetary policy change on the output-inflation and unemployment-inflation trade-offs. Findings - The findings denote that the disinflationary process implemented in Brazil, after the adoption of inflation targeting, is not associated with the emergence of the above-mentioned trade-offs. Furthermore, the development of credibility in the conduction of monetary policy is an important element responsible for the achievement of this result. Practical implications - Development of credibility is an important strategy for improving the conduction of the monetary policy. Originality/value - The results of the paper give some new insights about the conduction of monetary policy for developing countries, which have adopted inflation targeting.

Financial market reactions to announcements of monetary policy decisions: Evidence from the Brazilian case

Purpose - The purpose of this paper is to make an analysis of the Brazilian experience after the adoption of inflation targeting concerning the effects caused by the new practices of transparency and communication in the monetary policy. Design/methodology/approach - Changes in the financial markets expectations due to monetary policy actions are analyzed based on methodologies proposed by Cook and Hahn and Kuttner. Daily data from transactions in the interbank deposit futures market of the Securities, Commodities and Futures Exchange (BMFB and the “wisdom period” – the second phase in the financial markets perception regarding an environment with more transparency. Findings - The findings are in consonance with the idea that an increase in central bank transparency and communication improves the efficiency of expectations hypothesis of the term structure of interest rate and the anticipation of changes in the interest rate target. Originality/value - This study offers some new insights into how central bank communication improves the efficiency of the monetary policy for developing countries, which have adopted inflation targeting.

Macroeconomic Determinants of Investment under Inflation Targeting: Empirical Evidence from the Brazilian Economy

ABSTRACT The use of interest rate as the main tool by which central banks implement inflation targets points to a strong link between private investment decisions and monetary policy. With the objective of contributing to the literature surrounding macroeconomic determinants of investment under inflation targeting, an empirical analysis through Generalized Method of Moments models for the Brazilian case is made. In a general way, the findings underscore the relevance of macroeconomic variables for the determination of investment. In particular, we find that success inflation targeting creates a stable macroeconomic environment that promotes private investment.

A NOTE ON OPENNESS AND INFLATION TARGETING: IMPLICATIONS FOR THE UNPLEASANT FISCAL ARITHMETIC

Emerging economies that have adopted inflation targeting and that combine low credibility, high public debt, and a high interest rate suffer from a typical problem. Increases in the interest rate to reduce departures of inflation from the target imply that a higher primary surplus is required for stabilizing public debt/GDP ratio. This tricky situation is known as “unpleasant fiscal arithmetic†(UFA). This article develops a theoretical model showing how increased financial openness and capital account liberalization can mitigate UFA. Furthermore, empirical evidence from the Brazilian case through OLS, GMM, and GMM system methods is offered. The findings show that increases in capital mobility and financial openness work as a commitment technology, which contributes to the success of the inflation targeting and thus reduces the risk of UFA.

Capital account liberalization and inflation: evidence from Brazil

The argument that capital account liberalization attenuates the time inconsistence problem in the conduction of monetary policy and thus, could improve the control of inflation, was tested for Brazil, in the short run, for different exchange rate regimes. The findings denote that a decrease in the capital account liberalization is capable of attenuating inflationary pressure and that the duration of this effect depends on the exchange regime used.The argument that capital account liberalization attenuates the time inconsistence problem in the conduction of monetary policy and thus, could improve the control of inflation, was tested for Brazil, in the short run, for different exchange rate regimes. The findings denote that a decrease in the capital account liberalization is capable of attenuating inflationary pressure and that the duration of this effect depends on the exchange regime used.

Public debt and risk premium: An analysis from an emerging economy

Purpose - This analysis seeks to deal with the emerging economies and to reveal that, if the fiscal authority is accountable with a policy that stabilizes the public debt/GDP ratio, the consequence is a low Treasury bond risk premium. Design/methodology/approach - Based on the purpose of this paper, a theoretical model is developed and empirical evidence through an autoregressive distributed lag (ADL) model, taking into account the Brazilian experience, is made. Findings - The findings denote that domestic variables are responsible for determining the risk premium. Moreover, a correct management of the public debt and the use of primary surplus targets make for a good strategy for promoting a fall in the Treasury bond risk premium. Practical implications - Primary surplus and public debt/GDP ratio can be used as important tools for mitigating the Treasury bond risk premium. Originality/value - The results of the paper give some new insights about the management of fiscal policy for developing countries.

Estimation of economic capital for operational risk in banking industry: a Brazilian case

This article presents an analysis for the estimation of economic capital concerning operational risk in a Brazilian banking industry case making use of Markov chains, Extreme Value Theory (EVT) and Peaks Over Threshold (POT) modelling. The findings denote that some existent methods present consistent results among institutions with similar characteristics of loss data.