Application of local projections in the monetary policy in Brazil

ABSTRACT

This article examines the relationship between selected monetary aggregates and inflation and output in Brazil. Impulse responses under VAR and local projections were used to discover the leading or lagging role of the monetary aggregates. In addition, the information provided by the monetary aggregates as predictors of output and inflation was examined. This was assessed by examining their predictive power for subsequent observations on an in-sample basis. Overall, the results indicate that in order to control inflation rates, Brazilian authorities should focus on restricting money supply rather than increasing interest rates.

KEYWORDS:

• Impulse response functions
• monetary policy
• Brazil

JEL CLASSIFICATION:

• C22
• E50
• E52

Acknowledgement

Hector Carcel would like to thank the Asociación de Amigos of the University of Navarra for the financial support during his doctoral studies.

Disclosure statement

No potential conflict of interest was reported by the authors.

Additional information

Funding

Prof. Luis A. Gil-Alana gratefully acknowledges financial support from the Ministerio de Economia y Competitividad [ECO2014-55236]