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An analysis of nonlinearity of the Brazilian Central Bank reaction function

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  • Jos� Luiz Rossi
  • Terence Pagano

Abstract

This article examines whether the Central Bank of Brazil's (BCB) reaction function has nonlinear properties and characterizes the type of preference of the BCB from July 2000 to August 2008. The tests reject the hypothesis of linearity in the BCB's reaction function. Furthermore, using a smooth-transition regression model, the results indicate that the BCB reacted more strongly in reducing interest rates when expected inflation was below target, than when it was above, which is consistent with the presence of recession avoidance preferences. Despite this, the results indicate that most of the time, the BCB respected the Taylor principle, strongly responding to changes in the expected inflation.

Suggested Citation

  • Jos� Luiz Rossi & Terence Pagano, 2013. "An analysis of nonlinearity of the Brazilian Central Bank reaction function," Applied Financial Economics, Taylor & Francis Journals, vol. 23(10), pages 837-845, May.
    • Handle: RePEc:taf:apfiec:v:23:y:2013:i:10:p:837-845
    DOI: 10.1080/09603107.2013.767978
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    1. Minella, Andre & de Freitas, Paulo Springer & Goldfajn, Ilan & Muinhos, Marcelo Kfoury, 2003. "Inflation targeting in Brazil: constructing credibility under exchange rate volatility," Journal of International Money and Finance, Elsevier, vol. 22(7), pages 1015-1040, December.
    2. Márcio Holland, 2005. "Monetary And Exchange Rate Policy In Brazil After Inflation Targeting," Anais do XXXIII Encontro Nacional de Economia [Proceedings of the 33rd Brazilian Economics Meeting] 032, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
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