Marcio Gomes Pinto Garcia

Monetary policy during Brazil's Real Plan: estimating the Central Bank's reaction function

This paper uses a Threshold Autoregressive (TAR) model with exogenous variables to explain a change in regime in Brazilian nominal interest rates. By using an indicator of currency crises the model tries to explain the difference in the dynamics of nominal interest rates during and out of a currency crises. The paper then compares the performance of the nonlinear model to a modified Taylor Rule adjusted to Brazilian interest rates, and shows that the former performs considerably better than the latter.

The Fisher effect in a signal extraction framework The recent Brazilian experience

Abstract This paper derives a signal extraction framework for examining all testable implications of the Fisher equation. The signal is the net of taxes nominal interest rate, which, under the Fisher model, equals inflation expectation plus the real rate (assumed to be constant or a constant plus a martingale difference). All alternative linear models can be represented as noise added to the signal. The international and Brazilian literature are briefly reviewed and the empirical tests reinterpreted in the signal extraction framework. The model is tested with Brazilian data for the period 1973–1990 using interest rate data on non-indexed certificates of deposit from a sample of major Brazilian banks. The framework detects little noise, i.e., the Fisher equation seems to reasonably fit the Brazilian evidence. This result carries the policy implication that the government cannot have the burden of financing its fiscal deficits ameliorated by issuing non-indexed debt in periods when inflation is escalating. Given the large fluctuations observed in ex post real rates in Brazil, the reasonable success of the Fisher equation also implies the existence of large inflation forecast errors, which suggest the need for further research on how agents form inflation expectations. When inflation escalates rapidly, as it did in the late 1980s in Brazil, price indices lag behind true inflation. This generates a Fisher effect even for indexed securities. The empirical evidence also corroborates the existence of this Fisher effect for indexed securities.

Avoiding some costs of inflation and crawling toward hyperinflation: the case of the Brazilian domestic currency substitute

The pattern of a classical hyperinflation is an acute acceleration of the inflation level accompanied by rapid substitution away from domestic currency. Until the Real Plan (1 July 1994), however, Brazil experienced inflation levels well above 1000% a year since 1988 without entering the classical hyperinflation path. Two elements played key roles in differentiating the Brazilian case from the classical hyperinflations: indexation and the provision of a reliable domestic currency substitute, i.e. the provision of liquidity to interest-bearing assets. This paper claims that the existence of this domestic currency substitute was the main source of both the inability of the Brazilian central bank to fight inflation and of the unwillingness of Brazilians to face the costs of such a fight. The provision of the domestic currency substitute through the banking sector is modeled, and the main macroeconomic consequences of this monetary regime are derived. Those are: the lack of a nominal anchor for the price system due to the passive monetary policy, and the non-controllability of seigniorage unlike traditional models of hyperinflations.

A regression tree analysis of real interest rate regime changes

This paper uses regression tree analysis to locate changes in the real interest rate process from the early 1950s to the early 1990s. We find important changes in the mean and variance of the process in 1972:Q4, 1980:Q1, and 1986:Q2. Removing the changing mean from the ex post real interest rate leaves a time series that is largely unpredictable - consistent with the view that it is a rational forecast error as predicted by the Fisher effect. This implies that the ex ante real interest rate is approximately a constant subject to infrequent but important changes.

Banks, Domestic Debt Intermediation and Confidence Crises: the Recent Brazilian Experience

This paper examines the recent evolution of the Brazilian public domestic debt and interprets it in light of the confidence crisis literature. The analysis of the recent developments in the Brazilian public domestic debt market shows that the likelihood of a default must not be assessed only using simple summary aggregate measures of public domestic debt size and maturity, but must also take into consideration other structural aspects. Our analysis emphasizes the two main pillars of the Brazilian public domestic debt market: home-bias and the role of the banking sector in intermediating the debt. Evidence from yields of a perfectly indexed bond shows that the rollover premium was very small when the devaluation occurred, and is still fairly small by October, 1999, indicating that the rollover of the public domestic debt has not, so far, constituted a serious problem. Positive prospects for the public domestic debt market will depend, however, on the Brazilian government maintaining the current fiscal austerity program.

Expectativas desagregadas, credibilidade do Banco Central e Cadeias de Markov

Propomos e implementamos uma medida da credibilidade do Banco Central do Brasil, fazendo uso de uma base de dados com expectativas desagregadas. A hipotese e de que a heterogeneidade das expectativas de longo prazo advenha de crencas distintas com relacao a aversao do Banco Central a inflacao. Desse modo, a existencia de agentes persistentemente otimistas ou pessimistas indicaria falta de credibilidade. Com base neste argumento, construimos um indice utilizando Cadeias de Markov. Nosso indice inova em relacao aos disponiveis na literatura por considerar a dispersao das expectativas. Nossos resultados sao comparados com os de outros artigos, corroborando o aprimoramento advindo da nova medida da credibilidade.

The Fiscal and Monetary History of Brazil: 1960–2016

Brazil had a long period of high inflation. It peaked around 100% per year in 1964, and accelerated again in the 1970s, reaching levels above 100% on average between 1980 and 1994. This last period coincided with severe balance of payments problems and economic stagnation that followed the external debt crisis in the early 1980s. We show that the high-inflation period (1960-1994) was characterized by a combination of deficits, passive monetary policy, and constraints to debt financing. The transition to the low-inflation period (1995-2016) was characterized by improvements in all those instances, but it did not lead to significant improvements in economic growth. In addition, we document a strong correlation between inflation rates and seigniorage revenues, but observing that the underlying inflation rates are too high for the modest levels of seigniorage revenues. Finally, we discuss the role of monetary passiveness and indexation in accounting for the unique features of the inflation dynamics in Brazil in comparison to the other Latin American countries.

Dispersão na fixação de preços no Brasil

We study how inflation in Brazil reacts to changes in the interest rates and in the exchange rate. Using a disaggregation of IPCA within 512 items, it is possible to show that, after an interest rate increase or exchange rate depreciation, price dispersion alters. Our results indicate, furthermore, that it takes from six to twelve months until price structure returns to the one that existed before the change. This result seems interesting because it shows that all price distribution is affected by a macroeconomic shock.