Fiscal effect from inflation targeting: the Brazilian experience

Abstract

This article evaluates the presence of possible unpleasant effects on the fiscal side due to a disinflation process initiated with the adoption of inflation targeting in Brazil. The analysis for this country deserves attention because, credibility is still being built and Brazil represents a potential laboratory experiment in which the effects of an adoption of inflation targeting, after more than half a decade, can be studied. Under this perspective, an empirical analysis based on OLS, GMM and VAR methods is made. The findings denote that the development of credibility is a powerful instrument for eliminating the unpleasant effects from a tight monetary policy (necessity of increasing primary surplus) on public debt.

Notes

¹ See Cecchetti and Ehrmann (1999), Bernanke et al. (1999), Corbo and Schmidt-Hebbel (2000), Neumann and von Hagen (2002), de Mendonça (2007a).

² The analysis made by Mikek (2004) for the New Zealand case is a good example.

³ For an analysis of inflation targeting and its performance in Brazil, see de Mendonça (2007b).

⁴ The official price index that is used in the Brazilian inflation targeting is the National Consumer Price Index (extended)–IPCA (official price index).

⁵ The last observation of each month was considered in the calculation of the credibility index.

⁶ For an analysis of the main motives that explain the behaviour of credibility index, see de Mendonça (2007b).

⁷ It is important to note that almost 60% of the public debt is indexed by Over/Selic (basic interest rate).

⁸ The only exception is the credibility which is calculated through Equation 1.