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Inflation Targeting in Brazil: Constructing Credibility Under Exchange Rate Volatility

Author

Listed:
  • André Minella

    (BANCO CENTRAL)

  • Paulo Springer de Freitas

    (BANCO CENTRAL)

  • Ilan Goldfajn

    (PUC-RJ)

  • Marcelo Kfoury Muinhos

    (BANCO CENTRAL)

Abstract
This paper assesses the challenges faced by the inflation-targeting regime in Brazil. The confidence crisis in the future performance of the Brazilian economy and the increase in risk aversion in international markets were responsible for a sudden stop of capital inflows in 2002 that caused a significant depreciation of the exchange rate. The inflation-targeting framework has played a critical role in macroeconomic stabilization. We stress two important challenges: construction of credibility and exchange rate volatility. The estimations indicate the following results: i) the inflation targets have worked as an important coordinator of expectations; ii) the Central Bank has reacted strongly to inflation expectations; iii) there has been a reduction in the degree of inflation persistence; and iv) the exchange rate pass-through for "administered or monitored" prices is two times higher than for "market" prices.
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Suggested Citation

  • André Minella & Paulo Springer de Freitas & Ilan Goldfajn & Marcelo Kfoury Muinhos, 2003. "Inflation Targeting in Brazil: Constructing Credibility Under Exchange Rate Volatility," Anais do XXXI Encontro Nacional de Economia [Proceedings of the 31st Brazilian Economics Meeting] b26, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    • Handle: RePEc:anp:en2003:b26
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