Optimal monetary rules: the case of Brazil

Abstract

Within a dynamic programming approach, an optimal rule for the central bank to attain its inflation targeting goals is derived. 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.