Monetary Policy and Inflation in Brazil (1975-2000): a VAR Estimation

This paper investigates monetary policy and basic macroeconomic relation-ships involving output, inflation rate, interest rate, and money in Brazil. Based on a vector autoregressive (VAR) estimation, it compares three different periods: moderately increasing inflation (1975-1985), high inflation (1985-1994), and low inflation (1994-2000). The main results are the following: (1) monetary policy shocks have significant effects on output; (2) monetary policy shocks do not induce a reduction in the inflation rate in the first two periods, but there are indications that they have gained power to affect prices after the Real Plan was launched; (3) monetary policy does not usually respond rapidly or actively to inflation-rate and output innovations; (4) in the recent period, the interest rate responds intensely to financial crises; (5) positive interest-rate shocks are accompanied by a decline in money in all the three periods; (6) the degree of inflation persistence is substantially lower in the recent period.