The Effect of Adverse Supply Shocks on Monetary Policy and Output

ISSN 1518-3548 Working Paper Series The Effect of Adverse Supply Shocks on Monetary Policy and Output Maria da Glória D. S. Araújo, Mirta Bugarin, Marcelo Kfoury Muinhos and Jose Ricardo C. Silva April, 2006 ISSN 1518-3548 CGC 00.038.166/0001-05 Working Paper Series Brasília n. 103 Apr 2006 P. 1-44 Working Paper Series Edited by Research Department (Depep) – E-mail: [email protected] Editor: Benjamin Miranda Tabak – E-mail: [email protected] Editorial Assistent: Jane Sofia Moita – E-mail: [email protected] Head of Research Department: Carlos Hamilton Vasconcelos Araújo – E-mail: [email protected] The Banco Central do Brasil Working Papers are all evaluated in double blind referee process. Reproduction is permitted only if source is stated as follows: Working Paper n. 103. Authorized by Afonso Sant'Anna Bevilaqua, Deputy Governor of Economic Policy. General Control of Publications Banco Central do Brasil Secre/Surel/Dimep SBS – Quadra 3 – Bloco B – Edifício-Sede – M1 Caixa Postal 8.670 70074-900 Brasília – DF – Brazil Phones: (5561) 3414-3710 and 3414-3567 Fax: (5561) 3414-3626 E-mail: [email protected] The views expressed in this work are those of the authors and do not necessarily reflect those of the Banco Central or its members. Although these Working Papers often represent preliminary work, citation of source is required when used or reproduced. As opiniões expressas neste trabalho são exclusivamente do(s) autor(es) e não refletem, necessariamente, a visão do Banco Central do Brasil. Ainda que este artigo represente trabalho preliminar, citação da fonte é requerida mesmo quando reproduzido parcialmente. Consumer Complaints and Public Enquiries Center Address: Secre/Surel/Diate Edifício-Sede – 2º subsolo SBS – Quadra 3 – Zona Central 70074-900 Brasília – DF – Brazil Fax: (5561) 3414-2553 Internet: http://www.bcb.gov.br/?english The Effect of Adverse Supply Shocks on Monetary Policy and Output* Maria da Glória D. S. Araújo** Mirta Bugarin*** Marcelo Kfoury Muinhos** Jose Ricardo C. Silva** Abstract The 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. Keywords: stochastic dynamic general equilibrium model, stochastic process, staggered price. JEL Classification: E27, E52, E62. * The views expressed in this work are those of the authors and not reflect those of the Banco Central do Brasil or its members. ** Research Department, Banco Central do Brasil, Brazil. Correspondent author’s e-mail: [email protected] *** Department of Economics, Universidade de Brasília, Brazil. 3 1. Introduction Modeling economic dynamics is important for those who rely on macroeconomic analysis, especially the monetary authority. The behavior of the economy, and its dynamic responses to policy and external shocks are relevant to understanding how the economy reacts to different shocks in different situations. For example, given a set of conditions and a characterization of how different monetary policy rules will affect the reaction function of the economy. This paper attempts to evaluate the effect of an adverse supply shock (for example an oil price increase) on a Brazilian model economy using a dynamic general equilibrium framework. It is part of ongoing research based on Bugarin et al (2005), aimed at building a model economy for monetary policy analysis based on an optimizing dynamic general equilibrium model. Its main characteristic consists of forward-looking agents facing a staggered price setting in a small open economy. The pioneering theoretical work can be traced back to Taylor (1988, 1993). Svensson and van Wijnbergeh (1989), Obstfeld and Rogoff (1995, 1996), Betts and Devereux (1997. 1998), Kollmann (1997, 1999), Gali and Monacelti (1999). Ghironi (1999), Benigno and Benigno (2000), Chari, Kehoe and McGrattan (2000), Smets and Woutcrs (2000), Corsetti and Pesenti (2001). Following Bugarin et al. (2005), the special feature of this line of modeling is to construct a tractable micro-founded dynamic setting with forward-looking rational agents in a small open economy, which, through estimation or calibration processes, enables us to derive qualitative and quantitative assessments of an adverse supply shock into the model economy. As suggested by McCallum and Nelson (1998), McCallum and Nelson (2001), and Fraga, Goldfajn and Minella (2003), the openness of the economy is introduced by means of intermediate goods imports into the domestic economy's productive process.1 This characterization has two main advantages. First, it leads to a c1eaner and simpler theoretical structure compared to the usual alternative treatment of imports as consumption 1 See Calvo, Celasun and Kumhof (2003) for a model with tradable and non-tradable consumption goods. 4 goods. Second, it better captures the dynamic features presented in the data, namely the lagged correlation between the inflation rate and changes in the exchange rate, as well as the share of imports as a major item (60.6%) in imports for Brazil.2 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, the inflation rate, and the 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 in consideration the output gap and past interest rates with high persistence. The present study is divided into the following sections. Section 2 introduces the model economy, defines the dynamic equilibrium concept and characterizes the state space representation of the artificial economy. Section 3 presents the detailed description, or the parameterization process. The model's behavioral, technological as well as policy determined sets of parameters are set based on calibration or time series estimation. Section 4 presents the impulse responses to the exogenous shock to the artificial economy, which can be alternatively attributed to technology, aggregate demand, UIP, monetary policy rule, external income or fiscal innovation processes, and then summary statistics. The numerical computation of the equilibrium is based on the Schur decomposition in order to account for forward-looking endogenous variables. Section 5 presents a summary and conclusions. The main results are summed up in the last section in order to identify potential extensions to future research. 2. The Artificial Economy The benchmark model follows closely the one introduced by McCallum and Nelson (1998) and McCallum (2001). Its main feature includes an open economy where optimal behavior of consumers/producers lead to equilibrium transition paths of endogenously determined variables. Some of theses variables, like for instance the aggregate supply of the economy, behaves in a forward-looking manner to take into consideration staggered pricing 2 Source: Banco Central do Brasil 5 mechanism that generates inflation inertia and recessionary disinflations in the economy that allow the monetary policy interventions as well as the exogenous stochastic processes to produce, in equilibrium, real effects in the short run. Moreover, the monetary policy intervention is modeled by means of alternative Taylor type rules, which determine a reaction of the nominal interest rate to predetermined as well as forward-looking variables. These rules are based on research results presented by Fraga et ali (2003), Minella et ali (2003) and Alves and Muinhos (2002) 2.1 The Representative Household (Consumer-Producer) Problem There is a continuum of households acting as consumers-producers over the interval [0,1] deriving utility from a stream of optimally chosen sequence of consumption, C, and real balance holdings, M/P. Hence we can formally write down the problem faced by these agents as follows. max E 0 ∑ β t u C t + j , C t + j −1 , M t + j / Pt +A j ∞ t =0 [( )] (1) subject to the available CES production technology using labor, N , and imported intermediate goods, IM, as inputs of the production process, i.e. [ ( Yt = α 1 At N td v1 1 ] 1 d v1 v1 t ) + (1 − α )(IM ) (2) and, (real) budget constraint: ( ) ( Pt / Pt A ) DYt d + ( Pt / Pt A ) EX td − Ct + Wt / Pt A ( N tS − N td ) + TRt − ( M t − M t −1 ) / Pt A − − Bt −1 (1 + rt ) + Bt − Qt IM − Qt B (1 + κ t ) + Qt Bt* = 0 −1 d t * t +1 −1 (3) where, (i) the instantaneous utility function is assumed to be separable across consumption and money balances and captures the habit formation as depicted below: 6 ( ) u C t , C t −1 , M t / Pt A = exp(vt )(σ /(σ − 1))(C t / C t −1 ) h σ −1 σ + (1 − γ ) −1 ( M t / Pt A )1−γ (4) with σ >0, σ ≠ 1, ≠ 1, h h ∈ [0,1) and 0< <1. Using Dixit-Stiglitz (1977) composite θ −1 1  θ −1 consumption index, Ct =  ∫ Ct ( j ) θ dj  , θ > 1 with all j goods differentiated from each 0  θ other; (ii) technology parameters are such that α 1 ∈ (0,1], v1 ∈ (−∞,+∞) , At representing a technology shock parameter, Ntd the labor demanded at time t and IMtd the imported input in production purchased by the household; (iii) given the monopoly power to each specific home production, Pt denotes the good’s price as a choice variable. The household takes the domestic aggregate price level PtA, the nominal exchange rate St and the foreign price level Pt* as given. Moreover, since the household cannot price discriminate between domestic and foreign consumers, the price of that good for foreigners is given by Pt/St. (iv) DYtd denotes the domestic demand for the particular good. Note that if we define the foreign demand for the same good as EXtd, then total production of the specific good is Ytd = DYtd+ EXtd. The aggregate domestic demand then is given by 1−θ 1  1−θ A d A −θ A DYt = ( Pt / Pt ) DYt , where Pt =  ∫ Pt ( j ) dj  and DYt A is the aggregate of DYt d . It  0  1 is also assumed that the foreign demand for the respective household is given by EX td = ( Pt / Pt A ) −θ EX tA where EXtA is the aggregate export of the economy, such that aggregate export demand is positively related to the real exchange rate, Qt = S t Pt* / Pt A , i.e. EX tA = ( S t Pt* / Pt A )η Yt *b where η > 0, b > 0 .3 3 Since it is assumed a small open economy, the effect on domestic production on foreign price index is negligible. 7 (v) each household is endowed with one unit of workable time per period, supplies it inelastically, i.e. NtS, facing a nominal wage Wt. (vi) as a producer, each household chooses labor as well as imported input in an optimal manner, Ntd and IMtd. (vii) Government issues domestic debt. This asset could be considered as a perfect substitute of domestic private security which can be purchased at 1/(1+rt) per unit at time t. Households also can purchase foreign bonds at a price, in units of foreign output, given by 1/(1+κ)(1+rt*). The domestic and foreign bonds purchased by the household at time t is expressed as Bt and Bt* respectively. We also assume that the transversality conditions for assets hold, as well as government budget constraint and bond market clearing condition. 2.2 Optimality Conditions The above characterization allows us to derive the following first order conditions, where ξt and λt denotes the Lagrange multipliers for the technology constraint and the budget constraint respectively. (a) as consumer choosing optimally consumption and saving, in other words, with respect to Ct, Mt/PtA, Bt+1 and Bt+1*: h exp(vt )(1 / C t −1 )  Mt  A P  t     −γ σ −1 σ h −σh −σ −1 C tσ − βh exp(vt −1 )C t σ σ −1 C t +σ1 − λ = 0  1  Pt A    A  − 1 = 0 + λt Et     (1 + rt )  Pt −1   (5) (6) λt − βEt λt +1 (1 + rt ) = 0 (7) Qt λt − βEt λt +1 (1 + κ t )(1 + rt* ) = 0 (8) and, (b) as a producer, choosing optimally production inputs Ntd and IMtd: 8  λt   ξ t v1  Y  Wt  1−v1  A  − α 11−v1 At 1−v1  td  Pt   Nt 1 1  λt   1−v1 1−v  Yt  Qt  − (1 − α1 )1 1  d  IM t  ξ t   1 1  =0   (9)   = 0  (10) Observe that under price flexibility the mark-up is constant equal to λt θ = . ξt θ −1 2.3 Uncovered Interest Parity If one defines domestic and foreign interest rate as Rt = rt + Et ∆pt +1 and Rt * = rt * + E t ∆pt +1 * respectively, where pt = log Pt A , pt * = log Pt * and ∆ indicates the first difference operator, first order conditions (7) and (8) above imply that uncovered interest parity holds in equilibrium, i.e. Rt = Rt * + Et ∆s t +1 + κ t (11) where st = log S t . 2.4 Price Adjustment Decision The above household characterization give him/her market power to decide its own price Pt. Taking log of domestic and foreign demand for the household specific good, as presented in (iv) above, we have: dy td = dy tA − θ ( pt − ptA ) (12) extd = extA − θ ( pt − ptA ) (13) implying the following relationship between the log of relative output yt-ytA and the log of relative price pt-ptA: 9 yt − ytA = −θ ( pt − ptA ) (14) Following Calvo (1983) it is assumed that the households have to set their respective prices according to the pricing equation below. ∆p = βEt ∆pt +1 + ωygapt (15) setting w = 0.02. 2.5 Flexible Price Output Under price flexibility, labor input equals Nt = NtS = 1 for all t, then the flexible price output is given by: d v  Y t = α 1 ( At ) 1 + (1 − α 1 ) IM t  ( ) v1  v1  1 (16) and taking a log linear approximation: yt = (1 − δ 1 )α 1 + δ 1 m t (17)  IM SS where, using the Euler equation (5), δ = (1 − α 1 ) SS  Y  SS SS   = θ  Q IM  θ − 1  Y SS  v1   , ss denoting  steady state values. Defining again qt= log Qt, the logarithm of the real exchange rate, Q, optimality condition (10) implies: imt = y t − λ 1 log t 1 − v1  ξt  1 1  − qt + log(1 − α 1 ) 1 − v1  1 − v1 10 (18) Using the fact that under price flexibility the mark-up is constant, i.e. λt θ , = ξt θ −1 the corresponding log of imports at the flexible price output is given by4: im t = y t − 1 qt 1 − v1 (19) Thus, the flexible price output is function of the technology shock as well as the real exchange rate, i.e. y t = α1 − 1 θ Q SS IM SS qt (1 − v1 )(1 − δ 1 ) (θ − 1) Y SS (20) This relationship indicates that in this model exchange rate has an impact on domestic prices: changes in the (log) nominal exchange rate st, that affect the (log) real exchange rate, qt, lead to changes in pt through Et −1 p t . 2.6 Log-Linearization (a) Log-linearizing Euler equation (5), without considering the constant term, we have:  βh2σ + βhσ − βh2 −1 σ −1 σ −1 1 − βhρ ct − h ct −1 − βh Et ct +1 + logλt =  vt σ (1 − βh) σ (1− βh) σ (1 − βh) 1 − βh   (b) (21) Log-linearizing (7) in turn give us expression: log λt = Et log λt +1 + Rt − Et ∆pt +1 (22) From above two conditions, the corresponding expectational difference equation for consumption changes with habit persistence is given by5: 4 Neglecting constant term. 5 For h=0 the equation correspond to the case of non-h ext Woodford (1996). 11 = ηq t + byt* habit persistence as presented by β (h − σh) Et ∆ct + 2 + (1 + βh 2 − σβh 2 − σβh) Et ∆ct +1 + σ (1 − βh) Et ∆pt +1 = = (h − σh)∆ct + σ (1 − βh) Rt − σ (1 + ρ − βhρ 2 + βhρ ) (23) (c) In order to complete the log-linearized first order conditions we have to add the following set of equations: export function ext = ηqt + byt* (24) real exchange rate qt = s t − pt + p t*ηqt (25) flexible price output y t = at − ωqt (26) Rt = Rt + Et st −1 − st + κk t (27) nominal aggregate domestic production xt = p t + y t (28) output gap y 't = yt − y t (29) * UIP C SS EX SS EX SS C SS aggregate domestic output consistency yt = SS ct + SS ext + [1 − SS − SS ]g t (30) Y Y Y Y Et y 't +1 = φ y 't expected aggregate supply import input function where, φ = imt = y t + 1 1 y 't − qt θ (1 − v1 ) 1 − v1 (31) (32) δ1 1 − (1 − 4α 2 β )1 / 2 c and ω = . ,α = (1 − v1 )(1 − δ 1 ) 2αβ 1 + c + cβ 2.7 Foreign Exogenous Variables We assume that both foreign interest rate Rt* as well as price level Pt* are constant for all t, and that the log of external output follows an AR(1) stable process, i.e.: yt* = ρ y* yt*−1 + ε t* , ε t* ≈ N (0, σ ε2* ) (33) 12 2.8 Adverse technological innovation In order to capture the impact of adverse supply, it is assumed that it works as an adverse technological innovation as suggested by Hall (1988) and Finn (2000)., i.e. at = ρ a at −1 + eat , eat ≈ N (0,σ ea2 ) (34) Therefore, in our model economy an adverse supply shock will enter as a negative unitary shock eat . Based on previous studies, the next sub-section introduces the monetary reaction functions considered in our study. 2.9 Taylor Type Monetary Policy Rules Alternative specification of monetary reaction functions were introduced into the model economy in order to perform a sensitivity analysis of derived impulse response to those interventions and to test robustness of the responses. The choice of the adopted monetary policy reaction functions is based on the existing literature for the Brazilian economy. All the reaction functions are built on a basic Taylor Rule where the monetary authority would react adjusting the nominal interest rate, R according to past interest rate, to expected deviation of future inflation rate form the target, E(πt-1 - π*), and to observed (past) output gap, y´t-1, smoothing it out around a long run equilibrium rate given by the parameter µ0. Coefficients vary to different estimations and specifications in this basic model. (i) Rule 1 Is based on Alves e Muinhos (2003). They estimate a Taylor Rule for the Brazilian economy using a model specification very similar to the one used in Fraga et Ali (2003) and Minella et ali (2002 e 2003). According to the authors an optimal monetary policy reaction function, using inflation expectation, captured by Market Expectation Time Series of Investor Relation Group of Banco Central do Brasil, can be summarized as follows. 13 2 Rt = µ Rt −1 + µ Et (π t + j − π * ) ρ + µ yt´´−1 + ε mr , emr ≈ N (0, σ mr ) (35a) 1 (ii) 2 3 Rule 2 This rule follows the results of Minella et ali (2003), and also Fraga et ali (2003) estimations without output gap, once the estimations with output gap present contra intuitive estimators for the parameters of the output gap. 2 Rt = µ Rt −1 + µ Et (π t + j − π * ) ρ + ε mr , emr ≈ N (0, σ mr ) 1 (iii) 2 (35b) Rule 3 This rule follows the simulations done by Minella et ali (2003), where the monetary authority react only to expected inflation deviation from the target, that means: 2 Rt = µ Et (π t + j − π * ) ρ + ε mr , emr ≈ N (0, σ mr ) 2 (35c) 2.10 The Model Economy in State Space Representation Pulling conditions (22), (23) and (25) to (32) with alternative policy rules (35a) to (35c) above, we can rewrite the system of equations that describes the equilibrium motion of this model economy as follows. A(24 x 24) Etyt+1 = B(24 x 24) yt + C(24 x 6) zt (36) where yt=[yE yP] YE = [ y ~ ´ t , yt , y t , Rt , qt , st , ct , log λt , ext , ∆xt , pt , ∆pt , ∆pt +1 ,imt ]0 ´ YE = [c , R , y , E ∆x , E t −1 t −1 t −1 t −1 t t −1 y t , Et −1 yt ,∆pt −1, pt −1, Et −1∆pt +1, Et −1∆pt ] and zt = [at , vt , ε mr ,t , κ t , yt* , g t ] vector of 6 exogenous shock processes. Moreover, the dynamics of zt can be summarized as: zt = a zt-1 + ut (37) 14 where the elements of a are given by coefficients of processes (24) to (32), assuming constant Rt* and Pt*. Therefore, the equilibrium rational expectation solution to (36) is then given by: yt = P1 kt + P2 zt (38) Kt = G Kt-1 + Nt (39) and, where Kt+1 = [kt+1 zt+1]’, Kt = [kt zt]’ and Nt = [0 ut], expressing the endogenous variables yE,t in terms of predetermined endogenous variables kt = [ct-1, Rt-1, yt-1, ∆pt-1, pt-1] as well as exogenous stochastic processes zt. 3 Parameterization of the Model Economy This section describes the procedure employed to parameterize the artificial economy constructed above. Econometric estimation of some parameters, calibration based on aggregate empirical relationships and results from previous studies on the Brazilian economy were employed as explained bellow. 1) Technology Parameters Given the CES production function used in 1 ν1 ν1 Yt = [α1 ( At ) + (1 − α1 )( IM t ) ] , the following values are adopted: v1 v1 = 0.7, estimated by Pessoa (2004) α1 = 0.65, estimated by Gomes et ali (2003) 15 the model, i.e. 2) Consumption Index Parameter The model uses the Dixit-Stiglitz (1977) composite consumption index, i.e. Ct = [ ∫ Ct ( j ) 1 θ −1 θ θ θ −1 dj ] , θ > 1 . Following McCallum (2000) we set θ = 6 , which implies a 0 mark-up value of 20%, i.e. 6/(6-1) = 1.2. 3) Export Function Parameters (in log) Given the export function ext = ηqt + byt* , the respective elasticity of exports to real exchange rate, qt, and rest of the world income, yt* , were estimated. The best fit gives us the following estimated values, η = 0.788 and b = 0.79. These values are very similar to the ones estimated by Pastore and Pinoti (1999) anc Faini, Pritchett and Clavijo (1992). 4) Imported Input Demand Function The import function of the artificial economy is given by the optimality condition of monopolistically competitive firms, i.e. impt = yt + m1dyt − m2 qt , m1 = 1 1 . Therefore, using the above parameter , m2 = θ (1 − v1 ) 1 − v1 values, we set m1 = 0.556, and m2 = 3.33. Observe that alternatively, we can estimate the real exchange rate as well as the income elasticity of imports, such that parameters θ and vt can be calibrated accordingly. Using estimates of Faini, Pritchet and Clavijo (1992) we obtain θ=2.97 and vt=1.91. These values are also used to perform the sensitivity analysis. 5) Preferences Parameters Recalling u (Ct ) = eν t that the σ  Ct    σ − 1  Cth−1  σ −1 σ instantaneous utility function is assumed as and taking the inter-temporal discount factor β = 0.99 as 16 presented by Bugarin, M. et ali (2000), the consumption Euler equation give us the remaining needed parameters related to the optimal consumption decision of the households, i.e. in log we have: c3 Et ct +1 = c1ct − c2 ct −1 − λt + c4 vt , c1 = ( βh 2σ + βhσ − βh 2 − 1) /(σ (1 − βh)), c2 = h((σ − 1) /(σ (1 − βh)), c3 = βc2 , c4 = (1 /(1 − βh))(1 − βhρν ) where ρν denotes the persistence parameter of the shock to consumption demand which is estimated bellow. The parameters σ = 0.4 and h = 0.8 are set to derive the values for c1 to c4 following the suggestion of McCallum and Nelson. Observe that that there are in the literature relatively wide ranges of values for these parameters, which represent the risk aversion and habit persistence of households. Accordingly, we set these values rather arbitrarily so that sensitivity analysis is going to be performed later on. In particular, the value σ = 0.6 and h = 0.6 reported by Lam and Tkacz (2004) are considered as alternative values. 6) Monetary Policy Rule The alternative Taylor type monetary policy rules are assumed according to specifications introduced in section 1.10 before, which give us the following parameter values present in Table 1: Table 1: Taylor Rule Parameter µRt-1 µExp(π-π*) µygap Rule 1: complete 0,80 0,26 0,16 Rule 2: without output gap 0,90 5,70 - - 1,50 - Rule 3: expectation only 17 Almeida Peres, Souza e Tabak (2003) have also estimated a Taylor rule for an open economy version in which the lagged nominal exchange rate and the contemporaneous variation in the real exchange rate are both introduced. Nevertheless in our numerical simulation we choose to restrict our analysis only to the above rules. This strategy follows the results introduced by Minella et ali (2003) who shows that the nominal exchange rate is not significant in a Taylor rule specification for the Brazilian economy. 7) Calvo’s Pricing Equation Following Calvo (1983) the model’s pricing equation is characterized as: ∆pt = βEt ∆pt +1 + ωygapt , following McCallum (2000) we set ω = 0.02. 8) Parameters for Exogenous AR (1) Stochastic Shocks Processes The numerical characterization of the stochastic process affecting different behavioral equations of the model economy is performed recalling that these shocks are strictly considered as state variables in the economy. Therefore, it is important to remark that herein we are not interested in fitting the best time series models to the data. We are rather concerned with the numerical characterization of the AR(1) exogenous stochastic processes included in our artificial economy: (i) Technological shock affecting potential output: following the estimations of TFP given by Alves and Muinhos (2002) this shock is characterized as an AR(1) stochastic process a persistence parameter value of ρiasc=0.9. (ii) Technological shock affecting potential output with high persistence: this shock is characterized as an AR(1) stochastic process a persistence parameter value of ρiasc=0.99. 4. Numerical Simulations With the model economy constructed in Section 2 and the parameterization of Section 3, several numerical simulations were performed as exercises aiming to describe the economic performance of our model economy. The algorithm used closely follows 18 McCallum and Nelson’s (1998) strategy, which uses the Schur decomposition to solve for the forward-looking endogenous variables, as suggested by Klein (2000). Moreover, McGrattan’s (1999) algorithm is implemented in order to get the actual and lagged correlations of the artificially obtained series. Particular attention is given to the impulse responses of the output gap, aggregate output, inflation rate and nominal interest rate. Moreover, the main statistics on contemporaneous standard deviations are presented. Based on the calibration procedure introduced in Section 2, the habit persistence in consumption is captured in the model by means of the behavioral parameter 0<h<1, which enters into the instantaneous utility function, given by (4), i.e. U(C,Ct-1)= exp(vt)(σ/(σ1))(Ct/Ct-1h) σ-1/σ , from which is derived the expectational Euler equation (23). In other words, “h” represents the importance of previous consumption in the utility function: close to 0 means there is no consumption in t-1 in the function. Accordingly, the closer “h” is to one, the more persistent the habit is in consumption. Following McCallum and Nelson (1998) we set h=0.8 as an alternative specification with habit persistence in consumption and h=o for the case of no persistence. In this case, the contemporaneous utility function is given by U(C,Ct-1)= exp(vt)(σ/(σ-1))(Ct/Ct-1h) σ-1/σ. The impulse responses resulting from the numerical simulation tend to show similar results, independent of habit persistence, as will be shown in section 4.2. The monetary policy intervention is captured by the alternative Taylor Rule specification (41a to 41c), as explained before. There are some differences in the reaction functions in accordance with the different Taylor Rules adopted, which will be described below in the subsections. In order to illustrate the way that this artificial economy reacts to an adverse supply shocks, we present the figures o section 4.2, which show the impulse responses to unitary shocks (innovations) to technology, taking into consideration the three different Taylor Rules described before. 19 4.1 Summary Statistics of Artificial Vs Real Series This section presents the summary statistics of the artificial series simulated averse supply shocks, as done in Bugarin et al. (2005). These statistics are compared to the ones corresponding to the real time series data. It is important to note that the statistics obtained from empirical evidence are very sample dependent. We report below only the ones corresponding to 1996:Q1 to 2003:Q4. Table 2 below shows the respective standard deviations. The model economy with Taylor Rule 3 (only expectation) and habit persistence in consumption is able to better reproduce the volatility of observed inflation rates. Rule 2 (without output gap) with persistence in consumption presents the closes volatility of output gap and nominal interest rate. None of the models mimics the volatility observed in the output gap. Data(*) Inflation Rate Output Output Gap Interest Rate 0.012904 0.056826 0.009978 0.048025 Model with Habit Persistence, h=0 Taylor Rule from Lagos e Muinhos 0.016410 0.097889 0.081828 0.015929 Taylor Rule without Output Gap 0.001696 0.043490 0.162603 0.015434 Simple Expectational Taylor Rule 0.006362 0.075509 0.176772 0.008976 Model with Habit Persistence, h=0,8 Taylor Rule from Lagos e Muinhos 0.017653 0.101863 0.090790 0.019726 Taylor Rule without Output Gap 0.002082 0.049180 0.163813 0.021847 Simple Expectational Taylor Rule 0.010599 0.099702 0.187875 0.014176 (*) Times Series data on quarterly from 1996.II to 2005.I. Data source: Banco Central do Brasil 20 4.2 Responses to Adverse Technological Productivity Shock Figures 1a and 2a below show the impulse response function derived from the model economy when analyzing a unitary adverse supply shock with an AR parameters of 0.9 and policy rule 1 (35a). These figures show a decrease in output and a higher decrease in potential output that result in an increase in the output gap. The use of this policy produces an initial small decrease in prices followed by an increase, and a lagged increase in the interest rate. The assumption of different habit persistences (h=0 and h=0.8) did not make any difference in the responses. Figure 1a: Impulse Responses to Unitary Productivity Shock, h = 0 and Taylor Rule from Lagos e Muinhos (2004) with persistence parameter of AR (1): 0.9 Aggregate Ouput Response Inflation Rate Response 0 0 -0.2 -0.05 -0.4 -0.1 -0.6 -0.15 -0.8 0 10 20 30 -0.2 40 Output Gap Response 0.03 0.3 0.02 0.2 0.01 0.1 0 0 10 20 30 10 20 30 40 Nominal Interest Rate Response 0.4 0 0 40 -0.01 21 0 10 20 30 40 Figure 2a: Impulse Responses to Unitary Productivity Shock, h = 0.8 and Taylor Rule from Aggregate Ouput Response Inflation Rate Response 0 0 -0.2 -0.05 -0.4 -0.1 -0.6 -0.15 -0.8 0 10 20 30 -0.2 40 Output Gap Response 0.03 0.6 0.02 0.4 0.01 0.2 0 0 10 20 30 10 20 30 40 Nominal Interest Rate Response 0.8 0 0 40 -0.01 0 10 20 30 40 Lagos e Muinhos (2004) with persistence parameter of AR (1): 0.9 Figures 3a and 4a below show the impulse response function derived from the model economy when analyzing a unitary adverse supply shock with an AR parameters of 0.9 and policy rule 2 (35b), where the reaction to the output gap was shut down. These figures show an increase in the output gap as a function of a significant decrease in potential output. Output, inflation and the interest rate, however, do not show significant variation, when the monetary authority does not react to changes in the output gap. The assumption of different habit persistences (h=0 and h=0.8) did not make any difference in the responses. 22 Figure 3a: Impulse Responses to Unitary Productivity Shock, h = 0 and Taylor Rule without Output Gap with persistence parameter of AR (1): 0.9 x 10 -15 Aggregate Ouput Response x 10 2 -16 Inflation Rate Response 1.5 1 1 0 0.5 -1 -2 0 10 20 30 0 0 40 x 10 Output Gap Response 1.5 0 1 -0.5 0.5 -1 0 0 10 20 30 -1.5 0 40 23 10 20 30 40 -14 Nominal Interest Rate Response 10 20 30 40 Figure 4a: Impulse Responses to Unitary Productivity Shock, h = 0.8 and Taylor Rule without Output Gap with persistence parameter of AR (1): 0.9 x 10 -15 x 10 Aggregate Ouput Response 5 -16 Inflation Rate Response 2 0 0 -2 -5 -10 0 -4 10 20 30 -6 0 40 x 10 Output Gap Response 1.5 10 1 5 0.5 0 0 0 10 20 30 -15 -5 0 40 10 20 30 40 Nominal Interest Rate Response 10 20 30 40 Figures 5a and 6a below show the impulse response function derived from the model economy when analyzing a unitary adverse supply shock with an AR parameters of 0.9 and policy rule 3 (35c), where the reaction of the monetary authority to the output gap and past interest rates was shut down. These figures show an increase in the output gap as a function of a significant decrease in potential output. Output, inflation and interest rates, however, do not show significant variation, when the monetary authority does not react to changes in the output gap. The assumption of different habit persistences (h=0 and h=0.8) did not make any difference in the responses. These results are the same as those observed with policy rule 2 (35b). 24 Figure 5a: Impulse Responses to Unitary Productivity Shock, h = 0 and Simple Expectational Taylor Rule with persistence parameter of AR (1): 0.9 x 10 -16 x 10 -16 Aggregate Ouput Response Inflation Rate Response 5 8 0 6 -5 4 -10 2 -15 0 10 20 30 40 0 0 10 20 30 40 x 10 -16 Output Gap Response Nominal Interest Rate Response 1 5 0 0.5 -5 0 0 10 20 30 40 -10 0 25 10 20 30 40 Figure 6a: Impulses Responses to Unitary Productivity Shock, h = 0.8 and Simple Expectational Taylor Rule with persistence parameter of AR (1): 0.90 x 10 -15 x 10 -16 Aggregate Ouput Response 4 Inflation Rate Response 0 3 -1 2 -2 1 0 0 10 20 30 40 -3 0 10 x 10 -16 4 Output Gap Response 1.5 20 30 40 Nominal Interest Rate Response 2 1 0 0.5 0 0 -2 10 20 30 40 -4 0 10 20 30 40 Figures 1b and 2b below show the impulse response function derived from the model economy when analyzing a unitary adverse supply shock with an AR parameters of 0.99, to simulate a higher persistence of the shock, and policy rule 1 (35a). These figures show a decrease in output, the output gap (meaning that, in this case, output falls more than potential output), inflation and the interest rate. Furthermore, these figures indicate that the responses take longer periods (longer than 40 periods). The assumption of different habit persistences (h=0 and h=0.8) did not make any difference in the responses. 26 Figure 1b: Impulse Responses to Unitary Productivity Shock, h = 0 and Taylor Rule from Lagos e Muinhos (2004) with persistence parameter of AR (1): 0.99 Aggregate Ouput Response Inflation Rate Response 0 0 -0.2 -0.5 -0.4 -1 -1.5 -0.6 0 10 20 30 40 -0.8 Output Gap Response 0 10 20 30 40 Nominal Interest Rate Response 0.5 0 -0.2 0 -0.4 -0.5 -1 -0.6 0 10 20 30 40 -0.8 27 0 10 20 30 40 Figure 2b: Impulses Response to Unitary Productivity Shock, h = 0.8 and Taylor Rule from Lagos e Muinhos (2004) with persistence parameter of AR (1): 0.99 Aggregate Ouput Response Inflation Rate Response 0 0 -0.2 -0.5 -0.4 -0.6 -1 0 10 20 30 40 -0.8 Output Gap Response 0.2 0.4 0 0.2 -0.2 0 -0.4 0 10 20 30 10 20 30 40 Nominal Interest Rate Response 0.6 -0.2 0 40 -0.6 0 10 20 30 40 Figures 3b and 4b below show the impulse response function derived from the model economy when analyzing a unitary adverse supply shock with an AR parameters of 0.99 and policy rule 2 (35b), where the reaction to the output gap was shut down. These figures do not show any significant movement in output, inflation or the interest rate (movements of order 10-14), while the output gap increases, revealing a reduction in potential output. As observed with rule one, this movement in the output gap does not return to equilibrium in the period of study (40 periods). The assumption of different habit persistences (h=0 and h=0.8) did not make any difference in the responses. 28 Figure 3b: Impulse Responses to Unitary Productivity Shock, h = 0 and Taylor Rule without Output Gap with persistence parameter of AR (1): 0.99 x 10 -15 x 10 -16 Aggregate Ouput Response Inflation Rate Response 1 2 0 1.5 -1 1 -2 0.5 -3 0 10 20 30 40 0 0 10 20 30 40 x 10 -14 Output Gap Response Nominal Interest Rate Response 1.5 0 1 -0.5 0.5 -1 0 0 10 20 30 40 -1.5 0 29 10 20 30 40 Figure 4b: Impulse Responses to Unitary Productivity Shock, h = 0 and Taylor Rule without Output Gap with persistence parameter of AR (1): 0.99 x 10 -15 x 10 -16 Aggregate Ouput Response Inflation Rate Response 1 2 0 1.5 -1 1 -2 0.5 -3 0 10 20 30 40 0 0 10 20 30 40 x 10 -14 Output Gap Response Nominal Interest Rate Response 1.5 0 1 -0.5 0.5 -1 0 0 10 20 30 40 -1.5 0 10 20 30 40 Figures 5b and 6ba below show the impulse response function derived from the model economy when analyzing a unitary adverse supply shock with an AR parameters of 0.99 and policy rule 3 (35c), where the reaction of the monetary authority to the output gap and past interest rates where shut down. As observed with figures 3b and 4b, there are no significant movements in output, inflation and the interest rate, while the output gap increases, revealing a reduction in potential output. This movement in the output gap does not return to equilibrium in the period of study (40 periods). 30 Figure 5b: Impulse Responses to Unitary Productivity Shock, h = 0 and Simple Expectational Taylor Rule with persistence parameter of AR(1): 0.99 x 10 -16 x 10 Aggregate Ouput Response 5 4 0 3 -5 2 -10 1 -15 0 10 20 30 0 0 40 x 10 Output Gap Response 1 -16 Inflation Rate Response 10 20 30 40 -16 Nominal Interest Rate Response 5 0 0.5 -5 0 0 10 20 30 40 -10 0 31 10 20 30 40 Figure 6b: Impulse Responses to Unitary Productivity Shock, h = 0.8 and Simple Expectational Taylor Rule with persistence parameter of AR (1): 0.99 x 10 -15 x 10 Aggregate Ouput Response 2 -16 Inflation Rate Response 3 1.5 2 1 1 0.5 0 0 10 20 30 0 0 40 x 10 Output Gap Response 1 10 20 30 40 -16 Nominal Interest Rate Response 6 4 0.5 2 0 0 10 20 30 0 0 40 10 20 30 40 5. Summary and Conclusions The main purpose of this paper is to observe the reaction functions of a model economy for monetary policy analysis, based on an optimizing dynamic general equilibrium model, to an adverse supply shock. Its principal characteristic consists of forward-looking agents facing a staggered price setting in a small open economy. The special feature of this line of modeling is to construct a tractable micro-founded dynamic setting with forward looking rational agents in a small open economy, which, through estimation or calibration processes, enables us to derive qualitative and quantitative assessments of various exogenous (stochastic) interventions into the model/economy, being an extension of Bugarin et al. (2005). 32 The exercise presented in this paper indicates that an open economy dynamic general equilibrium model, such as the one used here, constitutes a useful laboratory for short-run analysis. In summary, the following are the main results of the above numerical simulations: • The existence, or not, of habit persistence does not make a significant difference in the impulse responses; • As a result of the adverse supply shock, potential output falls independently of the monetary policy rule adopted; • When the monetary authority focuses on the output gap and past interest rates (rule 1), the decrease in potential output is accompanied by a decrease in output. When using AR=0.9, estimated by Alves and Muinhos (2002), the decrease in potential output was higher than the decrease in output, leading to an increase in the output gap. The opposite was observed when technological progress was more persistent. Interest rates increase in the first case and decrease in the second. With this rule, inflation presents an initial decrease, returning to equilibrium with AR=0.9; • When the monetary authority does not put any weight on the output gap (rules 2 and 3), the only significant movement observed was an increase in the output gap (indicating a reduction in potential output). Output, inflation and interest rates did not show any significant movement, independent of persistence; Therefore, the main conclusion of this work is that potential output decreases in the case of an adverse supply shock. But this decrease will have different impacts on output, inflation and interest rates, depending on the monetary policy rules adopted. Additionally, a higher persistence of the technological shock presents a reduction in the output gap as a response, and does not converge to equilibrium in the 40 periods analyzed. 33 Bibliographical References Alves, Sergio AL and Muinhos, M.K. (2003), "Medium Size-Macroeconomic Model for the Brazilian Economy”, Banco Central do Brasil, Working Paper Series 64. Almeida, C.L de, Peres, M.A., Souza, G. da Silva and Tabak, B.M. (2003) "Optimal Monetary Policy Rules: the case of Brazil”, Banco Central do Brasil, Working Paper Series 63. Altig, D. Christiano, L.J., Eichenbaum, M. and Linde, J. (2002) “An Estimated Dynamic, General Equilibrium model for Monetary Policy Analysis” mimeo. Alvarez, F., Atkenson, A. and Kehoe, P.J. (1999) “Money and Interest rates with Endogenously Segmented Markets”, NBER Working paper Series, 7060. Anderson. G. and Moore, G. (1985) “A Linear Algebraic Procedure for Solving Linear Perfect Foresight Models”, Economic Letters, 17 247-252. Araújo, c.H. V. and Guilllén, O.T. de C. (2002) "Componentes de Curto e Longo Prazo das Taxas de Juros no Brasil”, Banco Central do Brasil, Working Paper Series 55. Blanchard, O. J. and Kahn, C. (1980) “The Solution of Linear Difference Models under Rational Expectations”, Econometrica, Vol. 48, Issue 5, 1305-1312. Bugarin, Mirta, Muinhos, Marcelo K. , Silva, Jose Ricardo C. and Araújo, Maria da Glória D. S. (2005), “A Dynamic Small Open Economy General Equilibrium Model with Staggered Price for Brazil,” mimeo. Calvo, G.A. (1983) “Staggered Prices in a Utility-Maximizing Framework”, Journal of Monetary Economics, 12, 383-398. Calvo, G.A. and Vegh, C. (1994) “Stabilization Dynamics and Backward-Looking Contracts”, Journal of Development Economics, 43, 59-84. Calvo, G.A., Celasun, O. and Kumhof, M. (2003) “Inflation Inertia and Credible Disinflation – The Open Economy Case”, NBER Working Paper Series No 9557. Chari, V.V., Kehoe, P. and McGrattan, E.R. (2001) “Can Sticky Price Models Generate Volatile and Persistent Real Exchange Rates?” Federal Reserve Bank of Minneapolis, Research Department Staff Report 277. Christiano, L.J., Eichenbaum, M. and Evans, C.L. (1998) “Monetary Policy Shocks: What Have We Learned and to What End?”, NBER Working Papers, No 6400. Christiano, L.J., Eichenbaum, M. and Evans, C.L. (2001) “Nominal Rigidities and the Dynamics Effects of a Shock to Monetary Policy”, mimeo. 34 Clarida, R., Gali, J. and Gertler, M. (2001) “A Simple Framework for International Monetary Policy Analysis”, Carnegie-Rochester Conference Paper Series. Cochrane, J. (2000) “Money as Stock: price level determination with no money demand”, NBER Working Paper Series, 7498. Cooley, T. F. (ed.) (1995) Frontiers of Business Cycle Research. Princeton University Press. Dixit, A.K. and Sliglitz, J. "Monopolistic Competition and Optimum Product Diversity”, American Economic Review, 67, 297-308. Engel, C. (1999) “On the Foreign Exchange Risk Premium in Sticky Price General Equilibrium Models”, NBER Working Paper Series, 7067. Fraga, A, Goldfajn, I., and Minella, A. (2003) "Inflation Targeting in Emerging Market Economies”, NBER Macroeconomics Annual Number 18, The MIT Press, Cambridge, Massachusetts. Fuhrer, J. and Moore, G. (1995) “Inflation Persistence”, Quarterly Journal of Economics, 110 127-159. Finn, Mary, (2000), “Perfect Competition and the Effects of Energy Price Increases on Economic Activity,” Journal of Money, Credit and Banking 32:400-416. Gali, J. (2001) “New Perspectives in Monetary Policy, Inflation and the Business Cycle”, forthcoming in Dewatripont, M., Hansen, L. and Turnovsky, S. eds, Advances in Economic Theory, Cambridge University Press. Gomes, V., Bugarin M. and Ellery, R. (2002) "Long-run Implications of Investment and Capital Remuneration for Brazil”, mimeo, Depto de Economia, UnB. Hall, Rober E. (1988), “The relation between Prices and Marginal Cost in U.S. Industry.” Journal of Political Economy 96 (October): 921-947. Hall, Robert E. (1990), “Invariance Properties of Solow´s Productivity Residual.” In Growth-Productivity-Unemployment, edited by Peter A. Diamond. Cambridge, Mass.: MIT Press. Kim, In-Moo and Loungani, P. (1992), “The Role of Energy in Real Business Cycles Models,” journal of Monetary Economics, 173-190. Klein, P. (2000) “Using the Generalized Schur Form to Solve a Multivariate Linear Rational Expectations Model”, Journal of Economic Dynamics and Control, 24, 14051423. 35 Lam, J-P. and Tkacz, G. “Estimating Policy Neutral Interest Rates for Canada Using a Dynamic Stochastic General Equilibrium Framework”, Bank of Canada Working papers, 2004-9. Lane, P. (2001), “The New Open Economy Macroeconomics: A Survey”, Journal of International Economics, 54(2), 235-266. Leeper, E. (1991) “Equilibria Under Active and Passive Monetary and Fiscal Policies”, Journal of Monetary Economics, 27, 129-147. Leeper, E., Sims, C. and Zha, T. (1996) “What Does Monetary Policy Do?”, Brookings Papers on Economic Activity, 2, 1-63. Loureiro, A. S. and Holanda Barbosa, F. de (2004) "Risk Premia for Emerging Markets Bonds: evidence from Brazilian Government Debt, 1996-2002”, Banco Central do Brasil Working Paper Series 85. McCallum, B.T. (1998) "Solution to Linear Rational Expectation Models: a compact exposition”, Economic Letters, 61, 143-147. McCallum, B. T. and Nelson, E. (1998) “Nominal Income Targeting in an Open Economy Optimizing Market”, NBER Working Paper Series, WP 6675. ____________ (2001) “Monetary Policy for an Open Economy: an alternative framework with optimizing agents and sticky prices”, mimeo GSIA Carneige Mellon University. Minella, A, Freitas, P., Goldfajn, I. and Muinhos, M. (2002) "Inflation Targeting in Brazil: Lessons and Challenges”, Banco Central do Brasil, Working Paper Series, 53. Miranda, P.C., Muinhos, M.K. and Graminho, F.M. (2002) “A Taxa de Juros de Equilíbrio: uma abordagem múltipla”, mimeo, DEPEP, Banco Central do Brasil. Pessoa, S. A. (1999) "Ajustamento de uma Economia após Elevação da Produtividade", Pesquisa e Planejamento Econômico, Vo129, No 1,323-371. Rotemberg, J. (1982) “Sticky prices in the United States”, Journal of Political Economy, 90, 1187-1211. Rotemberg, J. and Woodford, M. (1996), “Imperfect Competition and the Effect of Energy Price Increases on Economic Activity,” Journal of Money, Credit and Banking 28:549-577. Taylor, J.B. (1980), “Aggregate Dynamics And Staggered Contracts”, Journal of Political Economy, 88, 1-24. Taylor, J.B. (1998), “Staggered Price and Wage Setting in Macroeconomics”, NBER Working Paper, No 6754. 36 Woodford, M. (1995) “Price Level Determinancy Without Control of a Monetary Aggregate”, NBER Working Paper Series, 5204. Woodford, M. (1998) “ Doing Without Money: controlling inflation in a post monetary world”, Review of Economic Dynamics, 1, 173-219. Woodford, M. (2002) “Inflation Stabilization and Macroeconomics, 2(1), article 1. 37 Welfare”, Contributions to Banco Central do Brasil Trabalhos para Discussão Os Trabalhos para Discussão podem ser acessados na internet, no formato PDF, no endereço: http://www.bc.gov.br Working Paper Series Working Papers in PDF format can be downloaded from: http://www.bc.gov.br 1 Implementing Inflation Targeting in Brazil Joel Bogdanski, Alexandre Antonio Tombini and Sérgio Ribeiro da Costa Werlang Jul/2000 2 Política Monetária e Supervisão do Sistema Financeiro Nacional no Banco Central do Brasil Eduardo Lundberg Jul/2000 Monetary Policy and Banking Supervision Functions on the Central Bank Eduardo Lundberg Jul/2000 3 Private Sector Participation: a Theoretical Justification of the Brazilian Position Sérgio Ribeiro da Costa Werlang Jul/2000 4 An Information Theory Approach to the Aggregation of Log-Linear Models Pedro H. Albuquerque Jul/2000 5 The Pass-Through from Depreciation to Inflation: a Panel Study Ilan Goldfajn and Sérgio Ribeiro da Costa Werlang Jul/2000 6 Optimal Interest Rate Rules in Inflation Targeting Frameworks José Alvaro Rodrigues Neto, Fabio Araújo and Marta Baltar J. Moreira Jul/2000 7 Leading Indicators of Inflation for Brazil Marcelle Chauvet Sep/2000 8 The Correlation Matrix of the Brazilian Central Bank’s Standard Model for Interest Rate Market Risk José Alvaro Rodrigues Neto Sep/2000 9 Estimating Exchange Market Pressure and Intervention Activity Emanuel-Werner Kohlscheen Nov/2000 10 Análise do Financiamento Externo a uma Pequena Economia Aplicação da Teoria do Prêmio Monetário ao Caso Brasileiro: 1991–1998 Carlos Hamilton Vasconcelos Araújo e Renato Galvão Flôres Júnior Mar/2001 11 A Note on the Efficient Estimation of Inflation in Brazil Michael F. Bryan and Stephen G. Cecchetti Mar/2001 12 A Test of Competition in Brazilian Banking Márcio I. Nakane Mar/2001 38 13 Modelos de Previsão de Insolvência Bancária no Brasil Marcio Magalhães Janot Mar/2001 14 Evaluating Core Inflation Measures for Brazil Francisco Marcos Rodrigues Figueiredo Mar/2001 15 Is It Worth Tracking Dollar/Real Implied Volatility? Sandro Canesso de Andrade and Benjamin Miranda Tabak Mar/2001 16 Avaliação das Projeções do Modelo Estrutural do Banco Central do Brasil para a Taxa de Variação do IPCA Sergio Afonso Lago Alves Mar/2001 Evaluation of the Central Bank of Brazil Structural Model’s Inflation Forecasts in an Inflation Targeting Framework Sergio Afonso Lago Alves Jul/2001 Estimando o Produto Potencial Brasileiro: uma Abordagem de Função de Produção Tito Nícias Teixeira da Silva Filho Abr/2001 Estimating Brazilian Potential Output: a Production Function Approach Tito Nícias Teixeira da Silva Filho Aug/2002 18 A Simple Model for Inflation Targeting in Brazil Paulo Springer de Freitas and Marcelo Kfoury Muinhos Apr/2001 19 Uncovered Interest Parity with Fundamentals: a Brazilian Exchange Rate Forecast Model Marcelo Kfoury Muinhos, Paulo Springer de Freitas and Fabio Araújo May/2001 20 Credit Channel without the LM Curve Victorio Y. T. Chu and Márcio I. Nakane May/2001 21 Os Impactos Econômicos da CPMF: Teoria e Evidência Pedro H. Albuquerque Jun/2001 22 Decentralized Portfolio Management Paulo Coutinho and Benjamin Miranda Tabak Jun/2001 23 Os Efeitos da CPMF sobre a Intermediação Financeira Sérgio Mikio Koyama e Márcio I. Nakane Jul/2001 24 Inflation Targeting in Brazil: Shocks, Backward-Looking Prices, and IMF Conditionality Joel Bogdanski, Paulo Springer de Freitas, Ilan Goldfajn and Alexandre Antonio Tombini Aug/2001 25 Inflation Targeting in Brazil: Reviewing Two Years of Monetary Policy 1999/00 Pedro Fachada Aug/2001 26 Inflation Targeting in an Open Financially Integrated Emerging Economy: the Case of Brazil Marcelo Kfoury Muinhos Aug/2001 27 Complementaridade e Fungibilidade dos Fluxos de Capitais Internacionais Carlos Hamilton Vasconcelos Araújo e Renato Galvão Flôres Júnior Set/2001 17 39 28 Regras Monetárias e Dinâmica Macroeconômica no Brasil: uma Abordagem de Expectativas Racionais Marco Antonio Bonomo e Ricardo D. Brito Nov/2001 29 Using a Money Demand Model to Evaluate Monetary Policies in Brazil Pedro H. Albuquerque and Solange Gouvêa Nov/2001 30 Testing the Expectations Hypothesis in the Brazilian Term Structure of Interest Rates Benjamin Miranda Tabak and Sandro Canesso de Andrade Nov/2001 31 Algumas Considerações sobre a Sazonalidade no IPCA Francisco Marcos R. Figueiredo e Roberta Blass Staub Nov/2001 32 Crises Cambiais e Ataques Especulativos no Brasil Mauro Costa Miranda Nov/2001 33 Monetary Policy and Inflation in Brazil (1975-2000): a VAR Estimation André Minella Nov/2001 34 Constrained Discretion and Collective Action Problems: Reflections on the Resolution of International Financial Crises Arminio Fraga and Daniel Luiz Gleizer Nov/2001 35 Uma Definição Operacional de Estabilidade de Preços Tito Nícias Teixeira da Silva Filho Dez/2001 36 Can Emerging Markets Float? Should They Inflation Target? Barry Eichengreen Feb/2002 37 Monetary Policy in Brazil: Remarks on the Inflation Targeting Regime, Public Debt Management and Open Market Operations Luiz Fernando Figueiredo, Pedro Fachada and Sérgio Goldenstein Mar/2002 38 Volatilidade Implícita e Antecipação de Eventos de Stress: um Teste para o Mercado Brasileiro Frederico Pechir Gomes Mar/2002 39 Opções sobre Dólar Comercial e Expectativas a Respeito do Comportamento da Taxa de Câmbio Paulo Castor de Castro Mar/2002 40 Speculative Attacks on Debts, Dollarization and Optimum Currency Areas Aloisio Araujo and Márcia Leon Apr/2002 41 Mudanças de Regime no Câmbio Brasileiro Carlos Hamilton V. Araújo e Getúlio B. da Silveira Filho Jun/2002 42 Modelo Estrutural com Setor Externo: Endogenização do Prêmio de Risco e do Câmbio Marcelo Kfoury Muinhos, Sérgio Afonso Lago Alves e Gil Riella Jun/2002 43 The Effects of the Brazilian ADRs Program on Domestic Market Efficiency Benjamin Miranda Tabak and Eduardo José Araújo Lima Jun/2002 40 Jun/2002 44 Estrutura Competitiva, Produtividade Industrial e Liberação Comercial no Brasil Pedro Cavalcanti Ferreira e Osmani Teixeira de Carvalho Guillén 45 Optimal Monetary Policy, Gains from Commitment, and Inflation Persistence André Minella Aug/2002 46 The Determinants of Bank Interest Spread in Brazil Tarsila Segalla Afanasieff, Priscilla Maria Villa Lhacer and Márcio I. Nakane Aug/2002 47 Indicadores Derivados de Agregados Monetários Fernando de Aquino Fonseca Neto e José Albuquerque Júnior Set/2002 48 Should Government Smooth Exchange Rate Risk? Ilan Goldfajn and Marcos Antonio Silveira Sep/2002 49 Desenvolvimento do Sistema Financeiro e Crescimento Econômico no Brasil: Evidências de Causalidade Orlando Carneiro de Matos Set/2002 50 Macroeconomic Coordination and Inflation Targeting in a Two-Country Model Eui Jung Chang, Marcelo Kfoury Muinhos and Joanílio Rodolpho Teixeira Sep/2002 51 Credit Channel with Sovereign Credit Risk: an Empirical Test Victorio Yi Tson Chu Sep/2002 52 Generalized Hyperbolic Distributions and Brazilian Data José Fajardo and Aquiles Farias Sep/2002 53 Inflation Targeting in Brazil: Lessons and Challenges André Minella, Paulo Springer de Freitas, Ilan Goldfajn and Marcelo Kfoury Muinhos Nov/2002 54 Stock Returns and Volatility Benjamin Miranda Tabak and Solange Maria Guerra Nov/2002 55 Componentes de Curto e Longo Prazo das Taxas de Juros no Brasil Carlos Hamilton Vasconcelos Araújo e Osmani Teixeira de Carvalho de Guillén Nov/2002 56 Causality and Cointegration in Stock Markets: the Case of Latin America Benjamin Miranda Tabak and Eduardo José Araújo Lima Dec/2002 57 As Leis de Falência: uma Abordagem Econômica Aloisio Araujo Dez/2002 58 The Random Walk Hypothesis and the Behavior of Foreign Capital Portfolio Flows: the Brazilian Stock Market Case Benjamin Miranda Tabak Dec/2002 59 Os Preços Administrados e a Inflação no Brasil Francisco Marcos R. Figueiredo e Thaís Porto Ferreira Dez/2002 60 Delegated Portfolio Management Paulo Coutinho and Benjamin Miranda Tabak Dec/2002 41 61 O Uso de Dados de Alta Freqüência na Estimação da Volatilidade e do Valor em Risco para o Ibovespa João Maurício de Souza Moreira e Eduardo Facó Lemgruber Dez/2002 62 Taxa de Juros e Concentração Bancária no Brasil Eduardo Kiyoshi Tonooka e Sérgio Mikio Koyama Fev/2003 63 Optimal Monetary Rules: the Case of Brazil Charles Lima de Almeida, Marco Aurélio Peres, Geraldo da Silva e Souza and Benjamin Miranda Tabak Feb/2003 64 Medium-Size Macroeconomic Model for the Brazilian Economy Marcelo Kfoury Muinhos and Sergio Afonso Lago Alves Feb/2003 65 On the Information Content of Oil Future Prices Benjamin Miranda Tabak Feb/2003 66 A Taxa de Juros de Equilíbrio: uma Abordagem Múltipla Pedro Calhman de Miranda e Marcelo Kfoury Muinhos Fev/2003 67 Avaliação de Métodos de Cálculo de Exigência de Capital para Risco de Mercado de Carteiras de Ações no Brasil Gustavo S. Araújo, João Maurício S. Moreira e Ricardo S. Maia Clemente Fev/2003 68 Real Balances in the Utility Function: Evidence for Brazil Leonardo Soriano de Alencar and Márcio I. Nakane Feb/2003 69 r-filters: a Hodrick-Prescott Filter Generalization Fabio Araújo, Marta Baltar Moreira Areosa and José Alvaro Rodrigues Neto Feb/2003 70 Monetary Policy Surprises and the Brazilian Term Structure of Interest Rates Benjamin Miranda Tabak Feb/2003 71 On Shadow-Prices of Banks in Real-Time Gross Settlement Systems Rodrigo Penaloza Apr/2003 72 O Prêmio pela Maturidade na Estrutura a Termo das Taxas de Juros Brasileiras Ricardo Dias de Oliveira Brito, Angelo J. Mont'Alverne Duarte e Osmani Teixeira de C. Guillen Maio/2003 73 Análise de Componentes Principais de Dados Funcionais – Uma Aplicação às Estruturas a Termo de Taxas de Juros Getúlio Borges da Silveira e Octavio Bessada Maio/2003 74 Aplicação do Modelo de Black, Derman & Toy à Precificação de Opções Sobre Títulos de Renda Fixa Octavio Manuel Bessada Lion, Carlos Alberto Nunes Cosenza e César das Neves Maio/2003 75 Brazil’s Financial System: Resilience to Shocks, no Currency Substitution, but Struggling to Promote Growth Ilan Goldfajn, Katherine Hennings and Helio Mori 42 Jun/2003 76 Inflation Targeting in Emerging Market Economies Arminio Fraga, Ilan Goldfajn and André Minella Jun/2003 77 Inflation Targeting in Brazil: Constructing Credibility under Exchange Rate Volatility André Minella, Paulo Springer de Freitas, Ilan Goldfajn and Marcelo Kfoury Muinhos Jul/2003 78 Contornando os Pressupostos de Black & Scholes: Aplicação do Modelo de Precificação de Opções de Duan no Mercado Brasileiro Gustavo Silva Araújo, Claudio Henrique da Silveira Barbedo, Antonio Carlos Figueiredo, Eduardo Facó Lemgruber Out/2003 79 Inclusão do Decaimento Temporal na Metodologia Delta-Gama para o Cálculo do VaR de Carteiras Compradas em Opções no Brasil Claudio Henrique da Silveira Barbedo, Gustavo Silva Araújo, Eduardo Facó Lemgruber Out/2003 80 Diferenças e Semelhanças entre Países da América Latina: uma Análise de Markov Switching para os Ciclos Econômicos de Brasil e Argentina Arnildo da Silva Correa Out/2003 81 Bank Competition, Agency Costs and the Performance of the Monetary Policy Leonardo Soriano de Alencar and Márcio I. Nakane Jan/2004 82 Carteiras de Opções: Avaliação de Metodologias de Exigência de Capital no Mercado Brasileiro Cláudio Henrique da Silveira Barbedo e Gustavo Silva Araújo Mar/2004 83 Does Inflation Targeting Reduce Inflation? An Analysis for the OECD Industrial Countries Thomas Y. Wu May/2004 84 Speculative Attacks on Debts and Optimum Currency Area: A Welfare Analysis Aloisio Araujo and Marcia Leon May/2004 85 Risk Premia for Emerging Markets Bonds: Evidence from Brazilian Government Debt, 1996-2002 André Soares Loureiro and Fernando de Holanda Barbosa May/2004 86 Identificação do Fator Estocástico de Descontos e Algumas Implicações sobre Testes de Modelos de Consumo Fabio Araujo e João Victor Issler Maio/2004 87 Mercado de Crédito: uma Análise Econométrica dos Volumes de Crédito Total e Habitacional no Brasil Ana Carla Abrão Costa Dez/2004 88 Ciclos Internacionais de Negócios: uma Análise de Mudança de Regime Markoviano para Brasil, Argentina e Estados Unidos Arnildo da Silva Correa e Ronald Otto Hillbrecht Dez/2004 89 O Mercado de Hedge Cambial no Brasil: Reação das Instituições Financeiras a Intervenções do Banco Central Fernando N. de Oliveira Dez/2004 43 90 Bank Privatization and Productivity: Evidence for Brazil Márcio I. Nakane and Daniela B. Weintraub Dec/2004 91 Credit Risk Measurement and the Regulation of Bank Capital and Provision Requirements in Brazil – A Corporate Analysis Ricardo Schechtman, Valéria Salomão Garcia, Sergio Mikio Koyama and Guilherme Cronemberger Parente Dec/2004 92 Steady-State Analysis of an Open Economy General Equilibrium Model for Brazil Mirta Noemi Sataka Bugarin, Roberto de Goes Ellery Jr., Victor Gomes Silva, Marcelo Kfoury Muinhos Apr/2005 93 Avaliação de Modelos de Cálculo de Exigência de Capital para Risco Cambial Claudio H. da S. Barbedo, Gustavo S. Araújo, João Maurício S. Moreira e Ricardo S. Maia Clemente Abr/2005 94 Simulação Histórica Filtrada: Incorporação da Volatilidade ao Modelo Histórico de Cálculo de Risco para Ativos Não-Lineares Claudio Henrique da Silveira Barbedo, Gustavo Silva Araújo e Eduardo Facó Lemgruber Abr/2005 95 Comment on Market Discipline and Monetary Policy by Carl Walsh Maurício S. Bugarin and Fábia A. de Carvalho Apr/2005 96 O que É Estratégia: uma Abordagem Multiparadigmática para a Disciplina Anthero de Moraes Meirelles Ago/2005 97 Finance and the Business Cycle: a Kalman Filter Approach with Markov Switching Ryan A. Compton and Jose Ricardo da Costa e Silva Aug/2005 98 Capital Flows Cycle: Stylized Facts and Empirical Evidences for Emerging Market Economies Helio Mori and Marcelo Kfoury Muinhos Aug/2005 99 Adequação das Medidas de Valor em Risco na Formulação da Exigência de Capital para Estratégias de Opções no Mercado Brasileiro Gustavo Silva Araújo, Claudio Henrique da Silveira Barbedo,e Eduardo Facó Lemgruber Set/2005 100 Targets and Inflation Dynamics Sergio A. L. Alves and Waldyr D. Areosa Oct/2005 101 Comparing Equilibrium Real Interest Rates: Different Approaches to Measure Brazilian Rates Marcelo Kfoury Muinhos and Márcio I .Nakane Mar/2006 102 Judicial Risk and Credit Market Performance: Micro Evidence from Brazilian Payroll Loans Ana Carla A. Costa and João M. P. de Mello Apr/2006 44