4,745 research outputs found
The Effect of Adverse Supply Shocks on Monetary Policy and Output
No full textThe aim of the present research is to use a model economy built for Brazil, based on an optimizing dynamic general equilibrium model, in order to perform numerical simulations to derive the ability of the artificial economy to explain the impact of monetary policy interventions on short run economic performance in terms of the inflation rate, output gap, interest rate and level of economic activity in the face of an adverse supply shock. Alternative specification of monetary reaction functions are introduced into the model economy in order to perform a sensitivity analysis of derived impulse responses to those interventions facing the negative productivity shock. The preliminary results suggest that the introduction of habit persistence into the consumption hypothesis does not make much difference. However the introduction of different monetary reaction functions does alter the impulse response of output, inflation rate, and nominal interest rate. A common result is the decline in potential output for all models. Additionally, the only case where a reduction in the output gap is observed is when using the Taylor rule that takes into consideration the output gap and past interest rates with high persistence.
Steady State Analysis of an Open Economy General Equilibrium Model for Brazil
No full textThe aim of the present research is to build an open economy recursive general equilibrium model for the Brazilian economy in order to numerically assess the corresponding steady state equilibrium. This characterization allows us to numerically compute the endogenously determined steady state key relationship, namely the primary surplus aggregate output as well as the debt-product ratio among other variables, as functions of the monetary and fiscal policy parameters chosen by the government of the model economy. The adopted model introduces a transaction technology, which allows us to obtain a monetary equilibrium at steady state. This economy differs from the one used by Ljungqvist and Sargent (2000) for it considers an open economy with accumulation and production. The main result has shown that under the adopted parameterization the steady state of the model economy can numerically characterized by a debt output ratio of 0.3387. The numerical simulations show alternative steady states attainable by the government of the model economy. In order to finance higher expenses the government is bounded to trade-off higher interest rate (low inflation or high return on real money balances) with low operational surpluses due to the higher debt output ratio at the long run equilibrium.
Inflation Targeting in Brazil: Constructing Credibility under Exchange Rate Volatility
No full textThis 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.
Macroeconomic Coordination and Inflation Targeting in a Two-Country Model
No full textThis paper deals with a macroeconomic coordination and its stabilization within a new Keynesian framework. The dynamic treatment of a twocountry model is made by simulation, using the linear quadratic algorithm. We compare the optimal monetary policy rule for three types of equilibria: macroeconomic coordination, Nash and Stackelberg, using parameters that reflect the relative size and degree of openness of the economies. Under the strict inflation target, we obtain higher output and inflation volatilities due to each economy's reaction to the other country's policy. The only exception is the case of optimal macroeconomic coordination rules. This dynamic model finds that macroeconomic coordination policy is better than non-coordination rules, supporting the traditional result found in static models.
Is the Investment-Uncertainty Link Really Elusive? The Harmful Effects of Inflation Uncertainty in Brazil
No full textAfter being one the fastest growing countries in the world during the 1940-80 period, with an average growth rate of 6.8%, Brazil has experienced a severe growth slowdown since the 1980s, which coincided with the steep rise in inflation as of 1980. At the same time, real investment rates have plunged, shrinking around nine percentage points just in the 1980s. Moreover, they were unable to recover their 1989 level afterwards. This is unexpected as several pro-growth reforms took place since 1990, such as trade liberalization, privatization and economic stabilization. More strikingly, in the ten years following the stabilization of the economy, real investment rates have being at their lowest levels for, at least, fifty years. One major factor that could help explaining this dismal behavior is inflation uncertainty, which have remained high despite much lower inflation since 1994. Indeed, inflation uncertainty is at the root as many types of uncertainties faced by firms. For example, it also means uncertainty about future interest rates and demand. This work aims both at uncovering the main determinants that have driven M&E investment in Brazil since 1980 and testing the link between inflation uncertainty and investment. The evidence strongly suggests that inflation uncertainty has been an important investment deterrent in Brazil, both in the short and long runs. Moreover, its effects were found to be asymmetric. Also, despite the limited role played by price variables in empirical studies of investment, the real interest rate, itself importantly affected by inflation uncertainty and inflation risk premium, seems to be another key factor in explaining low investment rates in Brazil.
Out-Of-The_Money Monte Carlo Simulation Option Pricing: the join use of Importance Sampling and Descriptive Sampling
No full textAs in any Monte Carlo application, simulation option valuation produces imprecise estimates. In such an application, Descriptive Sampling (DS) has proven to be a powerful Variance Reduction Technique. However, this performance deteriorates as the probability of exercising an option decreases. In the case of out of the money options, the solution is to use Importance Sampling (IS). Following this track, the joint use of IS and DS is deserving of attention. Here, we evaluate and compare the benefits of using standard IS method with the joint use of IS and DS. We also investigate the influence of the problem dimensionality in the variance reduction achieved. Although the combination IS+DS showed gains over the standard IS implementation, the benefits in the case of out-of-the-money options were mainly due to the IS effect. On the other hand, the problem dimensionality did not affect the gains. Possible reasons for such results are discussed.
Interdependence and Contagion: an Analysis of Information Transmission in Latin America's Stock Markets
No full textThis paper brings evidences about the hypotheses of financial crisis contagion over Latin American stock markets in the 90's using a multivariate GARCH model. Beside the traditional volatility structure, we added a leverage term like GJR framework in order to avoid problems due to the use of conditional correlation as a measure of relationship between stock markets. The results show the existence of contagion only during the Asian (1997) and the Russian (1998) crises. The consequences of the Brazilian crisis (1999) can be identified as a result of interdependence among Latin American markets, while the crises of Mexico (1994) and Argentina (2001) show a specific mechanism of propagation. This result raises questions about the "contagion" and "interdependence" concepts' adequacy for the analysis of information transmission among stock markets.
Optimal Monetary Rules: The Case of Brazil
No full textWithin a dynamic programming approach we derive an optimal rule for the central bank to attain it's inflation targeting goals. The short-run nominal interest rate is used as an instrument to achieve monetary objectives. The model is tested for the Brazilian economy and compared with results found for other countries. Evidence for the estimated feedback interest rule for the Central Bank suggests that the cost of reducing inflation in an open economy is lower than that of a closed economy.
Speculative Attacks on Debts and Optimum Currency Area: A Welfare Analysis
No full textResorting to an extension of the debt crisis model of Cole and Kehoe (JIE 1996), we evaluate financial aspects of an optimum currency area. Our focus is to appraise the welfare of a country, which belongs to a monetary union and might suffer a speculative attack on its public debt. A default may be avoided by an inflation tax on common-currency debt, but this decision depends on majority voting and have costs associated with it. Moreover, the model considers symmetry between national and central governments' decisions about inflation and also describes the loss in international bankers' confidence towards one country being passed on to another. One of our results is that, for a country with low weight in the voting system, common-currency regime is superior in terms of expected welfare to dollarization and may be a better choice than the local-currency one, as the central bank under the latter regime undergoes some political influence from its government.
Foreign Exchange Market Volatility Information: An Investigation of Real-Dollar Exchange Rate
No full textPrice distributions estimation has become a relevant subject for risk and pricing literature. Special concern resides on tail probabilities, which usually presents more severe observations than those predicted by Normal distributions. This work aims to verify whether the volatility implied in dollar-real options contains useful information about unexpected large-magnitude returns. Implied volatility is also checked as a predictor for realized volatility. Our results indicate that implied volatilities indeed provide useful information on unusual returns and also work as a good predictor for observed volatility. Finally, we implement an early-warning system and implied volatilities seem to signalize large-magnitude returns.
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