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1 ISSN Working Paper Series 166 Tesing Hyperinflaion Theories Using he Inflaion Tax Curve: a case sudy Fernando de Holanda Barbosa and Tio Nícias Teixeira da Silva Filho July, 2008

2 ISSN CGC / Working Paper Series Brasília n. 166 Jul 2008 p. 1 37

3 Working Paper Series Edied by Research Deparmen (Depep) Edior: Benjamin Miranda Tabak Ediorial Assisen: Jane Sofia Moia Head of Research Deparmen: Carlos Hamilon Vasconcelos Araújo The Banco Cenral do Brasil Working Papers are all evaluaed in double blind referee process. Reproducion is permied only if source is saed as follows: Working Paper n Auhorized by Mário Mesquia, Depuy Governor for Economic Policy. General Conrol of Publicaions Banco Cenral do Brasil Secre/Surel/Dimep SBS Quadra 3 Bloco B Edifício-Sede 1º andar Caixa Posal Brasília DF Brazil Phones: (5561) and Fax: (5561) [email protected] The views expressed in his work are hose of he auhors and do no necessarily reflec hose of he Banco Cenral or is members. Alhough hese Working Papers ofen represen preliminary work, ciaion of source is required when used or reproduced. As opiniões expressas nese rabalho são exclusivamene do(s) auor(es) e não refleem, necessariamene, a visão do Banco Cenral do Brasil. Ainda que ese arigo represene rabalho preliminar, ciação da fone é requerida mesmo quando reproduzido parcialmene. Consumer Complains and Public Enquiries Cener Address: Secre/Surel/Diae Edifício-Sede 2º subsolo SBS Quadra 3 Zona Cenral Brasília DF Brazil Fax: (5561) Inerne: hp://

4 Tesing Hyperinflaion Theories Using he Inflaion Tax Curve: a case sudy * Fernando de Holanda Barbosa ** Tio Nícias Teixeira da Silva Filho *** Absrac The Working Papers should no be repored as represening he views of he Banco Cenral do Brasil. The views expressed in he papers are hose of he auhor(s) and do no necessarily reflec hose of he Banco Cenral do Brasil. This paper ess hyperinflaion heories using he inflaion ax curve. This curve is esimaed direcly insead of he usual approach which is a byproduc of demand for money empirical esimaes. The inflaion ax funcional form encompasses several specificaions as paricular cases and allows o es wheher or no money is inelasic. This sraegy is applied o he Brazilian annual daa covering almos half a cenury. The money inelasiciy hypohesis is rejeced. Thus, boh he bubble and he sric hyperinflaion hypoheses are rejeced. The weak hyperinflaion hypohesis is no rejeced and he Brazilian economy could have been in he wrong side of he Laffer curve for some ime during hyperinflaion. This oucome, conrary o convenional wisdom, is prediced by he weak hypohesis. Keywords: inflaion, inflaion ax, demand for money, money essenialiy, financial innovaion. JEL Classificaion: E31; E41; E42. * The auhors would like o hank Alexandre Barros da Cunha and Fabio Araujo for heir commens. ** Geulio Vargas Foundaion. [email protected]. *** Research Deparmen, Cenral Bank of Brazil. [email protected] 3

5 1. Inroducion The inflaion ax curve has been esimaed as a by-produc of demand for money equaions esimaes, which, in general, assume Cagan s (1956) funcional form. In ha specificaion he semi-elasiciy (α) of he demand for money wih regard o he inflaion rae is consan and is inverse (imes 100) equals he inflaion rae ha maximizes he governmen revenue from he inflaion ax. Table 1 Monhly Inflaion Rae ha Maximizes he Inflaion Tax Auhor Semi-Elasiciy (α) Coninuous Monhly Inflaion Rae (100/α) Cagan (1956) Barro (1970) Frenkel (1977) Sargen (1977) Goodfriend (1982) Burmeiser, Wall (1987) Crisiano (1987) Webb (1989) Casella (1989) Taylor (1991) Engsed (1993) Imrohoroglu (1993) Michael e al. (1994) Table 1 shows semi-elasiciy esimaes for he German hyperinflaion made by several economiss. The monhly inflaion rae esimaes ha maximize he inflaion ax range from 18.3% o 143%, wih inflaion being measured in coninuous erms. Table 1 esimaes, wih he excepion of hose made by Casella (1989) and Michael e al. (1994), lead one o conclude ha he German governmen could have obained more ax revenue wih lower inflaion raes, during he hyperinflaion. The esimaes of Casella (1989) and Michael e al. (1994) correspond o discree monhly inflaion raes of 216% 4

6 and 318%, respecively. Those raes were observed only in he las monhs of he German hyperinflaion. This paper ess hyperinflaion heories using he inflaion ax curve. This curve can be used o discriminae among hyperinflaion heories because a bubble or a sric hyperinflaion occurs only if money is inelasic and a weak hyperinflaion occurs only if money is non-inelasic, as will be shown in Secion 2. The empirical evidence presened here rejecs boh he bubble and he sric hyperinflaion hypoheses, bu does no rejec he weak hyperinflaion hypohesis. The weak hypohesis is consisen wih he fac ha he economy will be in he wrong side of he Laffer curve for some ime during a hyperinflaion. This oucome, conrary o convenional wisdom, is prediced by he weak hypohesis and solves an old puzzle of he hyperinflaion lieraure raised by Cagan s (1956) seminal paper. We follow a differen sraegy from oher papers in he lieraure, as hose lised above and esimae he inflaion ax curve direcly from a funcional form ha encompasses several specificaions as paricular cases. This approach also allows one o es wheher or no he demand for money specificaion used by Cagan is appropriae. This mehodology is applied o he Brazilian daa and rejecs money inelasiciy. The inflaion ax daa are annual and were calculaed by Cysne and Lisboa (2004) for he period. This period includes he Brazilian hyperinflaion, which sared in he second half of he 1980s and ended in 1994 wih he Real Plan. In conras o oher empirical sudies on he subjec, which use small samples covering only hyperinflaion periods, he sample here covers almos half a cenury, in which boh inflaion and he inflaion ax showed grea variabiliy. The paper is organised as follows: Secion 2 presens an abridged survey of hyperinflaion heories; Secion 3 lays ou wo funcional forms for he inflaion ax, one in which money is inelasic and anoher in which i is non-inelasic, as well as a funcional form ha encompasses boh forms as paricular cases; Secion 4 presens graphical evidence on he link beween he inflaion rae and he inflaion ax for Brazil; Secion 5 provides he empirical resuls and Secion 6 concludes by summarizing he resuls. 5

7 2. Hyperinflaion Theories Hyperinflaion heories explain his phenomenon eiher hrough fundamenals or bubbles. In boh cases he governmen finances is defici (f) issuing money (M): M& P = f, f = f ( ) (1) where a do represens a ime derivaive and P is he price level. The public defici increases hrough ime under a fiscal crisis. We define m = M P. Is derivaive wih respec o ime and he hypohesis ha he fiscal defici is financed issuing money yields: m& = f m π = f ( ) τ ( m) (2) where π is he rae of inflaion and τ ( m) = π m is he inflaion ax. Figure 1 Sric Hyperinflaion τ (m) H f ( ) h H f ( 0) ( 0) 0 = m( ) m h m Figure 1 shows he diagram of differenial equaion (2) where money is essenial, e.g., he absolue value of he elasiciy of he real quaniy of money wih 6

8 respec o he ineres rae is less han or equal o one [ τ ( m) 0 ]. The horizonal arrow owards he origin shows ha a bubble may exis. On he oher hand, if here is a fiscal crisis, he fiscal defici increases hrough ime, and he arrows on he inflaion ax curve depics a hyperinflaion pah (HH), saring a he poin where he real quaniy of money is m(0). 1 The rae of inflaion goes o infinie and he real quaniy of money approaches zero ( m ( ) = 0 ). This is a sric hyperinflaion [Barbosa e al. (2006), p ]. h Figure 2 Weak Hyperinflaion τ (m) H f ( ) h H B A f (0) 0 m ( h ) m ( 0) m Figure 2 shows he case where money is non-inelasic, e.g., he absolue value of he elasiciy of he real quaniy of money wih respec o he ineres rae can be noninelasic [ τ (m) is a bell-shaped curve]. The horizonal arrow away from he origin indicaes ha here is no bubble when money is non-inelasic. If here is a fiscal crisis, he fiscal defici increases, he rae of inflaion increases and evenually will reach he wrong side of he Laffer curve, as shown by he arrows on he inflaion ax curve (HH), wih he iniial value of he real quaniy of money being given by m(0) and he 1 The fiscal defici a he beginning of he fiscal crisis is f(0) and h represens he ime ha he hyperinflaion may las. Thus f ( h ) is he fiscal defici a his momen. The iniial real quaniy of money, for boh cases [Figures 1 and 2] saisfies he inequaliy; m& = f ( 0) τ ( m(0)) < 0. For more deails see Barbosa e al (2006). 7

9 final value by m ). This is a weak hyperinflaion [Barbosa e al (2006), p ], ( h since he rae of inflaion does no go o infinie and he real quaniy of money does no approach zero. Thus, here is nohing wrong wih being in he wrong side of he Laffer curve, since his is he oucome of he dynamics of a weak hyperinflaion. The weak hyperinflaion hypohesis is akin o Sargen and Wallace (1987) model wih one cavea. In heir model he public defici is consan and he hyperinflaion process is he ransiion pah from he unsable seady sae wih low inflaion o he sable one wih high inflaion, e.g., he pah from poin A o poin B along he inflaion ax curve in Figure 2. Sargen and Wallace do no provide a raionale for his pah o come ino exisence. The weak hyperinflaion pah (HH in Figure 2) is generaed by an increasing fiscal defici financed by issuing money. For he sake of compleeness we shall presen a sandard hyperinflaion model of a fiscal crisis wih rigidiy, eiher on expecaions or adjusmen on he money marke, which can be found in exbooks such as [Romer (2001), p ]. This model is based on Cagan s demand for money, log m = k α π e, α > 0 (3) e where π, he expeced rae of inflaion, follows he adapive mechanism: e e & π = β ( π π ), β > 0 (4) By combining equaions (1), (3) and (4) we obain he following differenial equaion: α β β k m β m& = f () + m log m, 1 α β > 0 (5) 1 α β 1 α β 1 α β Figure (3) shows he phase diagram of equaion (5). When he fiscal defici is consan, here are wo poins of equilibrium, one sable and he oher one unsable. Thus, a bubble may occur. If here is a fiscal crisis and he fiscal defici, which is money financed, jumps o an unsusainable level (from A o B) he economy eners a hyperinflaion pah (HH), he rae of inflaion goes o infinie and he real quaniy of money approaches zero. This model yields a sric hyperinflaion. However, i should be 8

10 poined ou ha during his pah, when he rae of inflaion is skyrockeing, he inflaion ax increases, e.g., money is inelasic. Figure 3 Sric Hyperinflaion wih Rigidiy From his survey we may conclude ha a bubble or a sric hyperinflaion may occur only if money is inelasic; a weak hyperinflaion may occur only if money is noninelasic. Thus, he inflaion ax curve can be used as a device o discriminae among hyperinflaion heories. 3. The Inflaion Tax Curve The inflaion ax (τ) equals he inflaion rae (π) he ax rae imes he real quaniy of money (m) he ax base. Tha is: τ = πm. Boh he ax and he real quaniy of money are defined in relaion o real GDP, assuming a uniy income elasiciy of money. I is more convenien o wrie he inflaion ax in is logarihmic form: log τ = logπ + logm (6) Noe ha he specificaion of equaion (6) depends on he demand for money funcional form. The wo specificaions below correspond, respecively, o he semi- 9

11 logarihmic and logarihmic cases. In he firs case he semi-elasiciy is consan and he absolue value of he real demand for money inflaion elasiciy η is proporional o he inflaion rae. In he second case he elasiciy is consan. logm k απ, η = απ, α > 0 (7) = 1 logm = k2 β logπ, η = β < 1 (8) Hence he inflaion ax funcional forms for each case are as follows: logτ = k 1 + logπ απ (9) ( 1 β ) logπ logτ = k 2 + (10) Figure 4 Two Cases for he Inflaion Tax Curve Log (Tax) Log (Tax) Log (π) Log (π) Figure 4a shows he inflaion ax curve produced by equaion (9), in which he semi-elasiciy is consan. Tha curve has a maximum for a given inflaion rae, ha is, he inflaion ax iniially increases wih inflaion and afer a cerain rae i begins o decrease. Figure 4b shows he inflaion ax curve yielded by equaion (10), in which he demand for money curve has a logarihmic specificaion. The curve is a sraigh line, ha is, he inflaion ax increases as he inflaion rae increases. In his case money is essenial since he elasiciy of he demand for money w.r.. he inflaion rae is always less han one [Barbosa and Cunha (2003) and Barbosa e al. (2006)]. 10

12 Noe ha he wo funcional forms of he inflaion ax curve are obained as paricular cases of he following funcion: logτ 2 = a0 + a1 logπ a π (11) The wo paricular cases are as follows: a) consan semi-elasiciy: a 1 = 1, a 2 > 0 ; consan elasiciy: a 2 = 0. The funcional form (11) also encompasses oher possibiliies ha are no resriced o he above wo cases. The inflaion ax elasiciy w.r.. he inflaion rae (ε) is given by: logτ = = a1 a π (12) log π ε 2 This elasiciy may be eiher negaive or posiive, depending upon he ax curve parameers and he inflaion rae. Tha is, he funcional form (11) is flexible enough o allow he daa o show he mos adequae shape of he inflaion ax curve. 4. The Inflaion Tax Curve in Brazil The inflaion ax was an imporan source of governmen financing in Brazil up o 1994, when he moneary policy regime changed and he Cenral Bank began o have inflaion conrol as is objecive. During he period he Brazilian Cenral Bank adoped a sysem of adminisered exchange rae in order o curb inflaion, and since 1999 i has been operaing under an inflaion argeing framework. Figure 5 shows how he inflaion ax and he (coninuous) inflaion rae evolved in Brazil during he period. The former increased from 1947 unil middle 1960s, when i began o decrease unil he beginning of he 1970s. Aferwards a new growh phase began, which ended wih he Real Plan in Noe ha while he inflaion ax peaked during he 1960s, inflaion acually peaked during he 1990s. Indeed, inflaion was subsanially higher during he laer period, when hyperinflaion was underway. This evidence srongly suggess he occurrence of imporan financial innovaions during he period under analysis, which sharply decreased he base of he inflaion ax for a given inflaion rae. 11

13 Figure 5 The Inflaion Rae and he Inflaion Tax in Brazil 2 6 Tax Inflaion Figure 6 displays four differen scaer plos beween he (coninuous) inflaion rae (x-axis) and he associaed inflaion ax (y-axis), according o he way each variable is measured. Noe ha he wo graphs in he lef half side do no show any obvious relaionship beween boh variables. However, he graphs placed in he righ half side are more revealing concerning he shape of he inflaion ax curve. In boh cases inflaion is measured in log erms and a clear posiive relaionship arises. The doublelog specificaion seems o provide a slighly beer fi, alhough i also suggess he possibiliy of a non linear relaionship. 2 The series are adjused by heir sample means for maximum fi. 12

14 Figure 6 Searching for he Inflaion Tax Curve Tax 2 4 ln(tax) Tax Inflaion ln(tax) Ln (Inflaion) Inflaion Ln (Inflaion) 5. Empirical Resuls Table 2 shows ADF uni roo ess resuls for he relevan variables and heir ransformaions. Recall ha inflaion is measured in coninuous erms. The es on he level of each variable does no rejec he hypohesis of a uni roo in all cases. However, he null is rejeced when he variables are expressed in firs differences, which means ha all of hem seem o be I (1). Those resuls open he possibiliy of esimaing he inflaion ax curve wihin a coinegraion framework. In order o uncover he inflaion ax curve for Brazil a general-o-specific model selecion sraegy is used. The general unresriced equilibrium correcion model is as follows: ΔlnTax = α + α T + α ST α ST + β lntax + β lnπ xx k xx n n n δ i iδlntax i + γ i iδ π i + λ i iδπ = ln 1 = 0 = 0 i + ε 1 + β π 2 1 (13) 13

15 where n is usually se a 2 and indicaes a ime rend beginning in ST xx sands for he spli rend. For example, ST 70 Table 2 ADF Uni Roo Tess 3 Variable βˆ ADF lags δ -es δ prob LEVELS Tax π ln (π) ln (Tax) FIRST DIFFERENCES ΔTax ** 0 Δπ ** 0 Δln (Tax) ** 0 Δln (π) ** 0 Noe ha he rends are essenial pars of he model, since hey ac, alogeher, as a proxy for financial innovaion. 4 Indeed, hey are likely o play a crucial role during modelling and esimaion since, as Figure 5 srongly suggess, financial innovaion was subsanial during he period under analysis. Moreover, financial innovaion is a key facor behind he link beween inflaion and inflaion ax, given ha i decreases he ax base for a given inflaion rae. Therefore, i could cause a srucural break in ha link, and is absence from he model can be read as a sign of serious misspecificaion. Finally, noe ha (13) encompasses he possibiliy of a spli rend wih several segmens. This makes sense since financial innovaion could have evolved a differen paces during he sample. For insance, he higher he inflaion rae, he bigger he incenive for agens o come up wih more money-demand-saving innovaions. Indeed, from he ouse i should be called o aenion ha coinegraion was 3 The es equaion is given by Δy = c + α + ( β ) y 1 + = δiδy i + ε 2 i 1 1. Significan levels of 5% and 10% are expressed, respecively, as * and **. 4 I should be poined ou ha heoreically hey pick all he facors ha influence he desire o hold money for a given inflaion rae, wheher hose are due o financial innovaions or no (e.g. changes in axes). Noneheless, for simpliciy, from now on we should refer o hem as a proxy for financial innovaion. 14

16 found only in hose specificaions ha included ime rends, aesing heir umos relevance. However, even in hose cases models showed signs of srucural break quie ofen, revealing he imporance of geing he rend righ. In fac, one major difficuly in searching for congruen models was precisely o uncover he he righ pah for financial innovaion. Equaions 14 and 15 show he wo final seleced specificaions (called models 1 and 2 in Table 3, respecively). All diagnosic saisics are saisfacory in boh cases. Moreover, recursive esimaes as well as recursive Chow ess placed in he Appendix show ha parameers are sable and no obvious srucural breaks are found. Those are significan resuls no only due o he long sample involved, bu also due o he fac ha during he period under analysis he Brazilian economy underwen significan changes and was subjeced o large shocks, including several sabilisaion plans, mos of hem wih heerodox feaures. ΔlnTax = T 0.04 ST ( 12.75) ( 6.04) ( 4.21) ( 5.17) ( 5.36) ( 6.15) LD ( 4.24) ( 9.32) ( 5.96) ( 14.28) lnπ D π ST D ST 1.26 lntax Δlnπ 0.42 Δπ ( 12.68) ( 4.59) ( 26.78) ( 6.88) ST 1 95 (14) T = 52 ( ); ˆ σ = 9.79% ; R 2 = 0.98; DW = 1.99; AR 1 2: F(2,36) = 0.57 (0.75); ARCH 1 1: F(1,36) = 0.57 (0.46); Heero: F(23, 14) = 0.32 (0.99); Normaliy: χ 2 (2) = 1.36 (0.51); RESET: F(1, 37) = 0.10 (0.75). Long-run elasiciies: ln π = 1. 05, π = ΔlnTax = T 0.05 ST ( 12.62) ( 6.54) ( 4.35) ( 4.41) ( 5.81) ( 4.90) ST D ( 6.06) ( 9.21) ( 5.97) ( 14.04) lnπ π D ST ST 1.26 lntax ( 12.47) ( 4.65) ( 26.36) ( 6.89) ST Δlnπ 0.42 Δπ 87 (15) T = 52 ( ); ˆ σ = 9.93% ; R 2 = 0.98; DW = 2.04; AR 1 2: F(2,36) = 0.32 (0.73); ARCH 1 1: F(1,36) = 0.65 (0.42); Heero: F(23, 14) = 0.32 (0.99); Normaliy: χ 2 (2) = 1.59 (0.45); RESET: F(1, 37) = 0.07 (0.79). Long-run elasiciies: ln π = 1. 06, π =

17 Overall, he wo models are remarkably similar, mainly regarding he quesions raised in his paper, which are relaed o he inflaion ax/demand for money funcional forms and he inelasiciy of money. In boh cases he funcional form given by (7) seems o be he mos appropriae, so ha money inelasiciy hypohesis is rejeced. Noe also ha in boh models no only he coefficiens aached o log inflaion have virually he same magniude, bu he hypohesis of a uniy elasiciy (i.e. a 1 = 1) could no be rejeced. Moreover, he value of he coefficien aached o he level of inflaion (i.e. semi-elasiciy) and, herefore, he implied inflaion rae ha maximises he inflaion ax, are very close o each oher. 5 Finally, in boh models srong coinegraion beween he variables is found, suggesing a genuine long run relaion among hem. 6 Table 3 Annual Inflaion Rae ha Maximises he Inflaion Tax Model Semi- Elasiciy (α) Coninuous Rae (100/α) Discree Rae Model % 3,358% Model % 3,030% Model 3 (Smooh) % 4,137% Model 4 (S % 3,055% Level/Slope) Table 3 shows he implied ax maximising inflaion raes, which seem o lie around 350% on coninuous erms. 7 This ranslaes ino discree raes a lile bi above 3,000% on an annual basis. Tha level is above he maximum calendar-year inflaion rae reached during he sample, which ook place in 1993, when inflaion reached 2708%, according o he IGP DI price index. However, i is well below he welvemonh raes observed in several monhs, such as hose from February 1990 o Augus 1990 and February 1994 o July The highes rae in hose wo periods occurred in 5 Noe, however, ha small variaions in he semi-elasiciy could mean large discrepancies in he associaed discree inflaion raes. Therefore, inferences regarding he ax maximising inflaion rae based solely on he difference beween coefficiens could be misleading. 6 Noe ha i is very unlikely he exisence of simulaneiy in boh cases. Moreover, he sraegy used here where he long run soluion and he shor run dynamics are esimaed a he same ime has he advanage of dealing wih he large finie-sample biases found in pracice when he Engle-Granger mehod is used, despie super-consisency. For Mone Carlo evidence on he large bias in he esimaion of he saic long run soluion see Banerjee e al. (1986). See also Banerjee e al. (1993). 7 Noe ha alhough he semi-elasiciies are expressed wih wo decimal places, he implied inflaion raes shown in Table 3 were calculaed from figures having four decimal places, since small changes in he former lead o big changes in he laer. 16

18 April 1990 (6602%) and June 1994 (5153%). The ax maximising inflaion raes implied by he models are lower han hose acually observed during he wors monhs of hyperinflaion. Thus, he Governmen was on he decreasing par of he inflaion ax curve. This fac is consisen wih he weak hyperinflaion hypohesis presened in Barbosa e al (2006)). In eiher case he Governmen did no seem o have maximised he inflaion ax during hyperinflaion. Figure 7 Financial Innovaion Modelo 1 (equação 14) Modelo 2 (equação 15) Alhough boh models are very similar, i is worhwhile o poin ou one minor bu revealing discrepancy beween hem, which concerns he shape of he rend (Figure 7). Noe ha boh rends pracically overlap each oher evolving virually a he same pace unil mid-1980s, coninuously rending downward, which suggess he occurrence of subsanial money-demand-saving financial innovaion during ha period. Financial innovaion was cerainly inense during hose years and, apparenly, acceleraed boh afer 1970 and Tha dynamics seems in accordance wih one s inuiion. Indeed, he Brazilian open-marke was creaed in early 1970s and could be he major facor behind he firs break, since i offered a new channel hrough which agens could proec hemselves agains inflaion. In is urn, in 1980 inflaion exceeded 100% 17

19 for he firs ime, and began o increase very rapidly hereafer, increasing he incenives for furher innovaions. 8 However, he rends begin o diverge from each oher in 1986, which is precisely he year when he firs sabilisaion Plan The Cruzado Plan ook place. 9 More specifically, while Model s 1 rend coninues decreasing unil 1994, Model s 2 rend jumps upwards in 1986 and hen coninues o fall unil 1994, when boh rends slope become posiive unil he end of he sample. 10 Noneheless, noe ha afer 1986 boh rends began o evolve a virually he same pace once again, rending parallel o each oher. Thus, here only is a level discrepancy beween hem since 1986, a difference ha was buil enirely in ha year. Tha discrepancy seems o be due o he Cruzado Plan, which apparenly caused a large (permanen) break in he relaion beween he inflaion ax and he inflaion rae, and his fac is being capured in wo differen ways by he models. While Model 1 capures i using a (level) dummy as of 1986, which adds o he consan, Model 2 capures i hrough a one-period jump in he rend iself. Even hough boh specificaions are equivalen, noe ha in he firs case one is explicily assuming ha he break had nohing o do wih financial innovaion iself. Also noe ha boh models conain wo (impulse) dummies in common, which are linked o clear economic evens. The firs refers o he year of 1994, when inflaion dropped sharply due o he Real Plan. The second dummy refers o 1998, when inflaion reached is lowes record level so far (1.7%), jus before he floaing of he currency in 1999, which was followed by an increase in inflaion. Finally, he posiive slope afer 1994 coincides wih he pos-sabilisaion period. Alhough a firs his resul is unexpeced since inflaion has been much lower since hen, a more deailed analysis shows ha here acually are wo facors ha could help explain his oucome. Firs, he so-called cheque ax (called CPMF laer on) was creaed on 1 s January 1994 and ended in December Tha ax applied every ime money was wihdrawn from one s bank accoun. The resul was an increase in demand for money, since money invesed for very shor periods of ime began o have negaive yield. Secondly, afer he sabilisaion here was indeed some reversal in financial innovaion. For example, during hyperinflaion all money lef in one s bank accoun 8 In addiion o reacing o higher inflaion, financial innovaion has surely an exogenous componen, which reflecs non-inflaion relaed echnological advances, such as he increasing use of compuers along ime and overall improvemens in echnology. 9 The Cruzado Plan ried o reduce inflaion using several heerodox measures such as price freezes, inervenions in conracs, ec. 10 In 1994 he Real Plan, which finally defeaed inflaion, was implemened. 18

20 above a cerain (very low) level was auomaically invesed by he banks hemselves in overnigh funds, and was auomaically wihdrawn when he accoun balance was insufficien o face obligaions (e.g. o pay a cheque). Tha financial innovaion kep money demand a minimum levels. However, since he sabilisaion of he economy such kind of mechanism has disappeared, increasing money demand. Alhough he use of spli rends provides a flexible framework wihin which financial innovaion could be modelled, and he resuling models seem o be coheren wih he daa, i is worhwhile o ask o wha exen he unexpeced posiive rend afer 1994 and, more generally, he overall shape of he curve were deermined by his paricular way of measuring financial innovaion. One could argue ha a more flexible and appealing sraegy is o use he unobserved componens (UC) framework and esimae a sochasic rend. Moreover, i could provide a robusness es for earlier resuls. Wih ha goal wo kinds of sochasic rends were esimaed using he Kalman Filer. In he firs case indicaed by (16) one assumes ha financial innovaion can be modelled as a smooh rend, which makes sense since i should evolve like a diffusion process over ime. In he second, one assumes a more flexible specificaion where boh he level and he slope are allowed o evolve sochasically according o (17). y = μ + β x + ε μ = β + μ β = β μ = β β = β ξ 1 y = μ + β x + ε + μ + ξ 1 + η ε N ξ N ε N η N ξ N 2 ( 0, σ ) 2 ( 0, σ ) ξ ε 2 ( 0, σ ε ) 2 ( 0, ση ) 2 ( 0, σ ) ξ (16) (17) where μ sands for he sochasic rend, x is a vecor of explanaory variables and E ( ε η ) E( ε ξ ) = E( η ξ ) = 0, = Using a general-o-specific model selecion sraegy wo specificaions, one for each case above, was seleced. Equaion (18) labelled Model 3 in Table 3 refers o specificaion (16), while equaion (19) labelled Model 4 represens specificaion (17). In he former case he level is fixed, while in he laer i is allowed o vary 19

21 sochasically. Before proceeding, one should noe ha while he sochasic rend is indeed a flexible framework, ha flexibiliy should be pu ino conex, since one is also assuming a paricular srucure for he rend. ΔlnTax = 1.84μT 1.11 D D lntax 1 ( 7.03) ( 7.56) ( 4.14) ( 13.02) lnπ π Δlnπ 0.40 Δ ( 9.07) ( 2.91) ( 17.62) ( 5.25) π (18) T = 52 ( ); ˆ σ =15.46% ; R 2 = 0.98; DW = 1.72; 2 Q (7, 6) = (0.09); H (16) = 0.55 (0.88); Normaliy: ( 2) Long-run elasiciies: ln π = 0. 97, π = χ = 1.34 (0.51) DH ΔlnTax = 1.93μT 1.08 D D lntax 1 ( 7.06) ( 7.52) ( 4.14) ( 13.32) lnπ π Δlnπ 0.41 Δ ( 9.17) ( 3.09) ( 17.63) ( 5.18) π (19) T = 52 ( ); ˆ σ =14.71% ; R 2 = 0.98; DW = 1.79; 2 Q (8, 6) = 5.50 (0.48); H (16) = 0.72 (0.74); Normaliy: ( 2) Long-run elasiciies: ln π = 0. 98, π = χ = 0.61 (0.74) DH where μ T sands for he value of he sochasic rend a he end of he sample. Q (p,q) is he Box-Ljung saisic for residual auocorrelaion based on he firs p auocorrelaions. 2 H (h) is a heeroscedasiciy es and ( 2) χ is a normaliy es based on he Bowman- DH Shenon saisic wih a correcion due o Doornik and Hansen (1994). See Koopman a al. (2000) for furher deails. All diagnosic ess are saisfacory, and he final models are very similar o he ones obained before. Likewise he OLS case, he relevan inflaion ax funcional form seems o be given by equaion (7) and, herefore, money inelasiciy is rejeced as well. Moreover, he elasiciy of he inflaion ax w.r.. log inflaion is around one as before, and he value of inflaion semi-elasiciy is pracically he same as hose obained from models 1 and 2 (alhough he implied discree inflaion rae of model 3 is no so close). 11 Table 3 gives he associaed ax maximising inflaion levels. 11 See foonoe 5. 20

22 Noe ha akin o equaion (15) boh specificaions do no include explicily he level dummy from 1986 onwards, since he sochasic rend is already capuring ha break. However, he las figure in he Appendix shows how boh sochasic rends look like when he level dummy is included in he models as in equaion (14). The effec is exacly he same of wha was found before, ha is, he (sochasic) rend coninues o fall unil 1994, insead of increasing emporarily in he second half of he 1980s. Finally, noe ha no only boh specificaions produce sochasic rends wih virually he same shape alhough Model s 4 rend is more nervous han Model 3 bu heir shape is very similar o wha was obained before, including he posiive slope afer 1994 (see Appendix). Tha evidence shows ha our previous modelling effor seems o have been very successful. Indeed, he sandard error of specificaions (14) and (15) is much smaller han hose of specificaions (18) and (19), suggesing ha he simpler OLS mehod does a beer job in modelling he inflaion ax han he fancier UC framework. More imporanly, he resuls presened here seem o be robus o he choice of how o model financial innovaion. 6. Conclusion The value added of his paper can be summed up as follows: i) he hypohesis ha money is inelasic is rejeced, since Cagan s demand for money specificaion is no rejeced for Brazilian annual daa covering he period 1947/2003; ii) he bubble and sric hyperinflaion hypoheses are rejeced; iii) he weak hyperinflaion hypohesis is no rejeced, and he Brazilian economy could have been in he wrong side of he Laffer curve for some period of ime during hyperinflaion; iv) he empirical evidence on German hyperinflaion presened on Table 1 is consisen wih he weak hyperinflaion hypohesis; v) he saemen usually made ha he governmen could have obained more ax revenue wih lower inflaion raes, during a hyperinflaion, is no correc under he weak hyperinflaion hypohesis. This fac is he oucome of he dynamics of he fiscal crisis ha yields a hyperinflaion pah. 21

23 References Banerjee, A., J. J. Dolado, D. F. Hendry and G. W. Smih (1986). Exploring Equilibrium Relaionships in Economerics hrough Saic Models. Oxford Bullein of Economics and Saisics 48, p Banerjee, A., J. Dolado, J. W. Galbraih and D. F. Hendry (1993). Coinegraion, Error Correcion and he Economeric Analysis of Non-Saionariy Daa. Oxford: Oxford Universiy Press. Barbosa, Fernando de Holanda and Alexandre Barros da Cunha (2003). Inflaion Tax and Money Essenialiy. Economics Leers 78, p Barbosa, Fernando de Holanda, Elvia Mureb Sallum and Alexandre Barros da Cunha (2006). Compeiive Equilibrium Hyperinflaion under Raional Expecaions. Economic Theory 29, p Barro, Rober J. (1970). Inflaion, he Paymens Period, and he Demand for Money. Journal of Poliical Economy 78, p Burmeiser, Edwin and Ken D. Wall (1987). Unobserved Raional Expecaions and he German Hyperinflaion wih Endogenous Money Supply. Inernaional Economic Review 28, p Cagan, Phillip (1956). The Moneary Dynamics of Hyperinflaion. In Milon Friedman (org.), Sudies in he Quaniy Theory of Money. Chicago: Universiy of Chicago Press. Casella, Alessandra (1989). Tesing for Raional Bubbles wih Exogenous or Endogenous Fundamenals: he German Hyperinflaion Once More. Journal of Moneary Economics 24, p Chrisiano, L. J. (1987). Cagan`s Model of Hyperinflaion Under Raional Expecaions. Inernaional Economic Review 28, p Cysne, Rubens P. and Paulo C. Coimbra Lisboa (2004). Imposo Inflacionário e Transferências Inflacionárias no Brasil: Ensaios Econômicos EPGE # 539. EPGE/FGV. Cukierman, Alex (1988). Rapid Inflaion-Deliberae Policy or Miscalculaion. Carnegie- Rocheser Conference Series on Public Policy 29, p Doornik, Jurgen and Henrik Hansen (1994). An Omnibus Tes for Univariae and Mulivariae Normaliy. Nuffield College Working Paper. Paper available a hp:// Easerly, William R., Paolo Mauro and Klaus Schmid-Hebbel (1995). Money Demand and Seigniorage-Maximizing Inflaion. Journal of Money, Credi and Banking 27, p Engsed, Tom (1993). Coinegraion and Cagan s Model of Hyperinflaion under Raional Expecaions. Journal of Money, Credi and Banking 25, p

24 Frenkel, Jacob A. (1977). The Forward Exchange Rae, Expecaions, and he Demand for Money: The German Hyperinflaion. American Economic Review 67, p Goodfriend, Marvin S. (1982). An Alernae Mehod of Esimaing he Cagan Money Deamand Funcion in Hyperinflaion Under Raional Expecaions. Journal of Moneary Economics 9, p Imrohoroglu, Selahain (1993). Tesing for Sunspo Equilibria in he German Hyperinflaion. Journal of Economics Dynamics and Conrol 17, p Koopman, S. J., A. C. Harvey, J. A. Doornik and N. Shephard (2000). Samp: Srucural Time Series Analyser, Modeller and Predicor. Timberlake Consulans Ld. Michael, P., A. R. Nobay and D. A Peel (1994). The German Hyperinflaion and he Demand for Money Revisied. Inernaional Economic Review 35, p Romer, David (2001). Advanced Macroeconomics. 2ed. Ediion.boson: McGraw Hill. Sargen, Thomas J. (1977). The Demand for Money Under Raional Expecaions: I. Inernaional Economic Review 77, p Sargen, T. and Neil Wallace (1987). Inflaion and he Governmen Budge Consrain. In: Razin, A., Sadka, E. (eds) Economic Policy in Theory and Pracice. New York: Macmillan. Taylor, Mark P. (1991). The Hyperinflaion Model of Money Demand. Journal of Money, Credi and Banking 23, p

25 Appendix Model 1 (Equaion 14) Recursive esimaes, 1-Sep Residuals +/- 2 S.E., 1-Sep Chow Tes, Break-Poin Chow Tes Consan +/-2SE Trend +/-2SE Spli1970_1 +/-2SE Spli1980 +/-2SE Spli1985 +/-2SE Spli1994_1 +/-2SE 0-1 DUM94 +/-2SE DUM94_4 +/-2SE 1 0 DUML86 +/-2SE LII_1 +/-2SE LIGPDI_1 +/-2SE 2 1 LLIGPDI_1 +/-2SE 0-2 DLIGPDI +/-2SE DLLIGPDI +/-2SE 0.25 Res1Sep up CHOWs 1% 1.0 Ndn CHOWs 1% 0.5 Model 2 (Equaion 15) Recursive esimaes, 1-Sep Residuals +/- 2 S.E., 1-Sep Chow Tes, Break-Poin Chow Tes 5.0 Consan +/-2SE Trend +/-2SE 0 DUM94 +/-2SE 1.0 DUM94_4 +/-2SE LII_1 +/-2SE LIGPDI_1 +/-2SE 2 1 LLIGPDI_1 +/-2SE 0-2 DLIGPDI +/-2SE DLLIGPDI +/-2SE Spli1985_2 +/-2SE Spli1970_2 +/-2SE Spli1994_1 +/-2SE Spli1980 +/-2SE 0.25 Res1Sep Spli1985_1 +/-2SE 1up CHOWs 1% 1.0 Ndn CHOWs 1%

26 Model 3 (Equaion 18) Smooh Trend (Fixed Level and Sochasic Slope) 2 DLII TrendX_DLII 3.0 Trend_DLII Slope_DLII Irr_DLII Model 4 (Equaion 19) Sochasic Level + Sochasic Slope 2 DLII TrendX_DLII 3.0 Trend_DLII Slope_DLII Irr_DLII

27 Sochasic Trends and Srucural Break 3 Smooh Trend 2 1 Model 3 (wihou Level Dummy) Model 3 (wih Level Dummy) Sochasic Trend/Level 2 1 Model 4 (wihou Level Dummy) Model 4 (wih Level Dummy)

28 Banco Cenral do Brasil Trabalhos para Discussão Os Trabalhos para Discussão podem ser acessados na inerne, no formao PDF, no endereço: hp:// Working Paper Series Working Papers in PDF forma can be downloaded from: hp:// 1 Implemening Inflaion Targeing in Brazil Joel Bogdanski, Alexandre Anonio Tombini and Sérgio Ribeiro da Cosa Werlang 2 Políica Moneária e Supervisão do Sisema Financeiro Nacional no Banco Cenral do Brasil Eduardo Lundberg Moneary Policy and Banking Supervision Funcions on he Cenral Bank Eduardo Lundberg 3 Privae Secor Paricipaion: a Theoreical Jusificaion of he Brazilian Posiion Sérgio Ribeiro da Cosa Werlang 4 An Informaion Theory Approach o he Aggregaion of Log-Linear Models Pedro H. Albuquerque 5 The Pass-Through from Depreciaion o Inflaion: a Panel Sudy Ilan Goldfajn and Sérgio Ribeiro da Cosa Werlang 6 Opimal Ineres Rae Rules in Inflaion Targeing Frameworks José Alvaro Rodrigues Neo, Fabio Araújo and Mara Balar J. Moreira 7 Leading Indicaors of Inflaion for Brazil Marcelle Chauve 8 The Correlaion Marix of he Brazilian Cenral Bank s Sandard Model for Ineres Rae Marke Risk José Alvaro Rodrigues Neo 9 Esimaing Exchange Marke Pressure and Inervenion Aciviy Emanuel-Werner Kohlscheen 10 Análise do Financiameno Exerno a uma Pequena Economia Aplicação da Teoria do Prêmio Moneário ao Caso Brasileiro: Carlos Hamilon Vasconcelos Araújo e Renao Galvão Flôres Júnior 11 A Noe on he Efficien Esimaion of Inflaion in Brazil Michael F. Bryan and Sephen G. Cecchei 12 A Tes of Compeiion in Brazilian Banking Márcio I. Nakane Jul/2000 Jul/2000 Jul/2000 Jul/2000 Jul/2000 Jul/2000 Jul/2000 Sep/2000 Sep/2000 Nov/2000 Mar/2001 Mar/2001 Mar/

29 13 Modelos de Previsão de Insolvência Bancária no Brasil Marcio Magalhães Jano 14 Evaluaing Core Inflaion Measures for Brazil Francisco Marcos Rodrigues Figueiredo 15 Is I Worh Tracking Dollar/Real Implied Volailiy? Sandro Canesso de Andrade and Benjamin Miranda Tabak 16 Avaliação das Projeções do Modelo Esruural do Banco Cenral do Brasil para a Taxa de Variação do IPCA Sergio Afonso Lago Alves Evaluaion of he Cenral Bank of Brazil Srucural Model s Inflaion Forecass in an Inflaion Targeing Framework Sergio Afonso Lago Alves 17 Esimando o Produo Poencial Brasileiro: uma Abordagem de Função de Produção Tio Nícias Teixeira da Silva Filho Esimaing Brazilian Poenial Oupu: a Producion Funcion Approach Tio Nícias Teixeira da Silva Filho 18 A Simple Model for Inflaion Targeing in Brazil Paulo Springer de Freias and Marcelo Kfoury Muinhos 19 Uncovered Ineres Pariy wih Fundamenals: a Brazilian Exchange Rae Forecas Model Marcelo Kfoury Muinhos, Paulo Springer de Freias and Fabio Araújo 20 Credi Channel wihou he LM Curve Vicorio Y. T. Chu and Márcio I. Nakane 21 Os Impacos Econômicos da CPMF: Teoria e Evidência Pedro H. Albuquerque 22 Decenralized Porfolio Managemen Paulo Couinho and Benjamin Miranda Tabak 23 Os Efeios da CPMF sobre a Inermediação Financeira Sérgio Mikio Koyama e Márcio I. Nakane 24 Inflaion Targeing in Brazil: Shocks, Backward-Looking Prices, and IMF Condiionaliy Joel Bogdanski, Paulo Springer de Freias, Ilan Goldfajn and Alexandre Anonio Tombini 25 Inflaion Targeing in Brazil: Reviewing Two Years of Moneary Policy 1999/00 Pedro Fachada 26 Inflaion Targeing in an Open Financially Inegraed Emerging Economy: he Case of Brazil Marcelo Kfoury Muinhos 27 Complemenaridade e Fungibilidade dos Fluxos de Capiais Inernacionais Carlos Hamilon Vasconcelos Araújo e Renao Galvão Flôres Júnior Mar/2001 Mar/2001 Mar/2001 Mar/2001 Jul/2001 Abr/2001 Aug/2002 Apr/2001 May/2001 May/2001 Jun/2001 Jun/2001 Jul/2001 Aug/2001 Aug/2001 Aug/2001 Se/

30 28 Regras Moneárias e Dinâmica Macroeconômica no Brasil: uma Abordagem de Expecaivas Racionais Marco Anonio Bonomo e Ricardo D. Brio 29 Using a Money Demand Model o Evaluae Moneary Policies in Brazil Pedro H. Albuquerque and Solange Gouvêa 30 Tesing he Expecaions Hypohesis in he Brazilian Term Srucure of Ineres Raes Benjamin Miranda Tabak and Sandro Canesso de Andrade 31 Algumas Considerações sobre a Sazonalidade no IPCA Francisco Marcos R. Figueiredo e Robera Blass Saub 32 Crises Cambiais e Aaques Especulaivos no Brasil Mauro Cosa Miranda 33 Moneary Policy and Inflaion in Brazil ( ): a VAR Esimaion André Minella 34 Consrained Discreion and Collecive Acion Problems: Reflecions on he Resoluion of Inernaional Financial Crises Arminio Fraga and Daniel Luiz Gleizer 35 Uma Definição Operacional de Esabilidade de Preços Tio Nícias Teixeira da Silva Filho 36 Can Emerging Markes Floa? Should They Inflaion Targe? Barry Eichengreen 37 Moneary Policy in Brazil: Remarks on he Inflaion Targeing Regime, Public Deb Managemen and Open Marke Operaions Luiz Fernando Figueiredo, Pedro Fachada and Sérgio Goldensein 38 Volailidade Implícia e Anecipação de Evenos de Sress: um Tese para o Mercado Brasileiro Frederico Pechir Gomes 39 Opções sobre Dólar Comercial e Expecaivas a Respeio do Comporameno da Taxa de Câmbio Paulo Casor de Casro 40 Speculaive Aacks on Debs, Dollarizaion and Opimum Currency Areas Aloisio Araujo and Márcia Leon 41 Mudanças de Regime no Câmbio Brasileiro Carlos Hamilon V. Araújo e Geúlio B. da Silveira Filho 42 Modelo Esruural com Seor Exerno: Endogenização do Prêmio de Risco e do Câmbio Marcelo Kfoury Muinhos, Sérgio Afonso Lago Alves e Gil Riella 43 The Effecs of he Brazilian ADRs Program on Domesic Marke Efficiency Benjamin Miranda Tabak and Eduardo José Araújo Lima Nov/2001 Nov/2001 Nov/2001 Nov/2001 Nov/2001 Nov/2001 Nov/2001 Dez/2001 Feb/2002 Mar/2002 Mar/2002 Mar/2002 Apr/2002 Jun/2002 Jun/2002 Jun/

31 44 Esruura Compeiiva, Produividade Indusrial e Liberação Comercial no Brasil Pedro Cavalcani Ferreira e Osmani Teixeira de Carvalho Guillén 45 Opimal Moneary Policy, Gains from Commimen, and Inflaion Persisence André Minella 46 The Deerminans of Bank Ineres Spread in Brazil Tarsila Segalla Afanasieff, Priscilla Maria Villa Lhacer and Márcio I. Nakane 47 Indicadores Derivados de Agregados Moneários Fernando de Aquino Fonseca Neo e José Albuquerque Júnior 48 Should Governmen Smooh Exchange Rae Risk? Ilan Goldfajn and Marcos Anonio Silveira 49 Desenvolvimeno do Sisema Financeiro e Crescimeno Econômico no Brasil: Evidências de Causalidade Orlando Carneiro de Maos 50 Macroeconomic Coordinaion and Inflaion Targeing in a Two-Counry Model Eui Jung Chang, Marcelo Kfoury Muinhos and Joanílio Rodolpho Teixeira 51 Credi Channel wih Sovereign Credi Risk: an Empirical Tes Vicorio Yi Tson Chu 52 Generalized Hyperbolic Disribuions and Brazilian Daa José Fajardo and Aquiles Farias 53 Inflaion Targeing in Brazil: Lessons and Challenges André Minella, Paulo Springer de Freias, Ilan Goldfajn and Marcelo Kfoury Muinhos 54 Sock Reurns and Volailiy Benjamin Miranda Tabak and Solange Maria Guerra 55 Componenes de Curo e Longo Prazo das Taxas de Juros no Brasil Carlos Hamilon Vasconcelos Araújo e Osmani Teixeira de Carvalho de Guillén 56 Causaliy and Coinegraion in Sock Markes: he Case of Lain America Benjamin Miranda Tabak and Eduardo José Araújo Lima 57 As Leis de Falência: uma Abordagem Econômica Aloisio Araujo 58 The Random Walk Hypohesis and he Behavior of Foreign Capial Porfolio Flows: he Brazilian Sock Marke Case Benjamin Miranda Tabak 59 Os Preços Adminisrados e a Inflação no Brasil Francisco Marcos R. Figueiredo e Thaís Poro Ferreira 60 Delegaed Porfolio Managemen Paulo Couinho and Benjamin Miranda Tabak Jun/2002 Aug/2002 Aug/2002 Se/2002 Sep/2002 Se/2002 Sep/2002 Sep/2002 Sep/2002 Nov/2002 Nov/2002 Nov/2002 Dec/2002 Dez/2002 Dec/2002 Dez/2002 Dec/

32 61 O Uso de Dados de Ala Freqüência na Esimação da Volailidade e do Valor em Risco para o Ibovespa João Maurício de Souza Moreira e Eduardo Facó Lemgruber 62 Taxa de Juros e Concenração Bancária no Brasil Eduardo Kiyoshi Tonooka e Sérgio Mikio Koyama 63 Opimal Moneary Rules: he Case of Brazil Charles Lima de Almeida, Marco Aurélio Peres, Geraldo da Silva e Souza and Benjamin Miranda Tabak 64 Medium-Size Macroeconomic Model for he Brazilian Economy Marcelo Kfoury Muinhos and Sergio Afonso Lago Alves 65 On he Informaion Conen of Oil Fuure Prices Benjamin Miranda Tabak 66 A Taxa de Juros de Equilíbrio: uma Abordagem Múlipla Pedro Calhman de Miranda e Marcelo Kfoury Muinhos 67 Avaliação de Méodos de Cálculo de Exigência de Capial para Risco de Mercado de Careiras de Ações no Brasil Gusavo S. Araújo, João Maurício S. Moreira e Ricardo S. Maia Clemene 68 Real Balances in he Uiliy Funcion: Evidence for Brazil Leonardo Soriano de Alencar and Márcio I. Nakane 69 r-filers: a Hodrick-Presco Filer Generalizaion Fabio Araújo, Mara Balar Moreira Areosa and José Alvaro Rodrigues Neo 70 Moneary Policy Surprises and he Brazilian Term Srucure of Ineres Raes Benjamin Miranda Tabak 71 On Shadow-Prices of Banks in Real-Time Gross Selemen Sysems Rodrigo Penaloza 72 O Prêmio pela Mauridade na Esruura a Termo das Taxas de Juros Brasileiras Ricardo Dias de Oliveira Brio, Angelo J. Mon'Alverne Duare e Osmani Teixeira de C. Guillen 73 Análise de Componenes Principais de Dados Funcionais uma Aplicação às Esruuras a Termo de Taxas de Juros Geúlio Borges da Silveira e Ocavio Bessada 74 Aplicação do Modelo de Black, Derman & Toy à Precificação de Opções Sobre Tíulos de Renda Fixa Ocavio Manuel Bessada Lion, Carlos Albero Nunes Cosenza e César das Neves 75 Brazil s Financial Sysem: Resilience o Shocks, no Currency Subsiuion, bu Sruggling o Promoe Growh Ilan Goldfajn, Kaherine Hennings and Helio Mori Dez/2002 Fev/2003 Feb/2003 Feb/2003 Feb/2003 Fev/2003 Fev/2003 Feb/2003 Feb/2003 Feb/2003 Apr/2003 Maio/2003 Maio/2003 Maio/2003 Jun/

33 76 Inflaion Targeing in Emerging Marke Economies Arminio Fraga, Ilan Goldfajn and André Minella 77 Inflaion Targeing in Brazil: Consrucing Credibiliy under Exchange Rae Volailiy André Minella, Paulo Springer de Freias, Ilan Goldfajn and Marcelo Kfoury Muinhos 78 Conornando os Pressuposos de Black & Scholes: Aplicação do Modelo de Precificação de Opções de Duan no Mercado Brasileiro Gusavo Silva Araújo, Claudio Henrique da Silveira Barbedo, Anonio Carlos Figueiredo, Eduardo Facó Lemgruber 79 Inclusão do Decaimeno Temporal na Meodologia Dela-Gama para o Cálculo do VaR de Careiras Compradas em Opções no Brasil Claudio Henrique da Silveira Barbedo, Gusavo Silva Araújo, Eduardo Facó Lemgruber 80 Diferenças e Semelhanças enre Países da América Laina: uma Análise de Markov Swiching para os Ciclos Econômicos de Brasil e Argenina Arnildo da Silva Correa 81 Bank Compeiion, Agency Coss and he Performance of he Moneary Policy Leonardo Soriano de Alencar and Márcio I. Nakane 82 Careiras de Opções: Avaliação de Meodologias de Exigência de Capial no Mercado Brasileiro Cláudio Henrique da Silveira Barbedo e Gusavo Silva Araújo 83 Does Inflaion Targeing Reduce Inflaion? An Analysis for he OECD Indusrial Counries Thomas Y. Wu 84 Speculaive Aacks on Debs and Opimum Currency Area: a Welfare Analysis Aloisio Araujo and Marcia Leon 85 Risk Premia for Emerging Markes Bonds: Evidence from Brazilian Governmen Deb, André Soares Loureiro and Fernando de Holanda Barbosa 86 Idenificação do Faor Esocásico de Desconos e Algumas Implicações sobre Teses de Modelos de Consumo Fabio Araujo e João Vicor Issler 87 Mercado de Crédio: uma Análise Economérica dos Volumes de Crédio Toal e Habiacional no Brasil Ana Carla Abrão Cosa 88 Ciclos Inernacionais de Negócios: uma Análise de Mudança de Regime Markoviano para Brasil, Argenina e Esados Unidos Arnildo da Silva Correa e Ronald Oo Hillbrech 89 O Mercado de Hedge Cambial no Brasil: Reação das Insiuições Financeiras a Inervenções do Banco Cenral Fernando N. de Oliveira Jun/2003 Jul/2003 Ou/2003 Ou/2003 Ou/2003 Jan/2004 Mar/2004 May/2004 May/2004 May/2004 Maio/2004 Dez/2004 Dez/2004 Dez/

34 90 Bank Privaizaion and Produciviy: Evidence for Brazil Márcio I. Nakane and Daniela B. Weinraub 91 Credi Risk Measuremen and he Regulaion of Bank Capial and Provision Requiremens in Brazil a Corporae Analysis Ricardo Schechman, Valéria Salomão Garcia, Sergio Mikio Koyama and Guilherme Cronemberger Parene 92 Seady-Sae Analysis of an Open Economy General Equilibrium Model for Brazil Mira Noemi Saaka Bugarin, Robero de Goes Ellery Jr., Vicor Gomes Silva, Marcelo Kfoury Muinhos 93 Avaliação de Modelos de Cálculo de Exigência de Capial para Risco Cambial Claudio H. da S. Barbedo, Gusavo S. Araújo, João Maurício S. Moreira e Ricardo S. Maia Clemene 94 Simulação Hisórica Filrada: Incorporação da Volailidade ao Modelo Hisórico de Cálculo de Risco para Aivos Não-Lineares Claudio Henrique da Silveira Barbedo, Gusavo Silva Araújo e Eduardo Facó Lemgruber 95 Commen on Marke Discipline and Moneary Policy by Carl Walsh Maurício S. Bugarin and Fábia A. de Carvalho 96 O que É Esraégia: uma Abordagem Muliparadigmáica para a Disciplina Anhero de Moraes Meirelles 97 Finance and he Business Cycle: a Kalman Filer Approach wih Markov Swiching Ryan A. Compon and Jose Ricardo da Cosa e Silva 98 Capial Flows Cycle: Sylized Facs and Empirical Evidences for Emerging Marke Economies Helio Mori e Marcelo Kfoury Muinhos 99 Adequação das Medidas de Valor em Risco na Formulação da Exigência de Capial para Esraégias de Opções no Mercado Brasileiro Gusavo Silva Araújo, Claudio Henrique da Silveira Barbedo,e Eduardo Facó Lemgruber 100 Targes and Inflaion Dynamics Sergio A. L. Alves and Waldyr D. Areosa 101 Comparing Equilibrium Real Ineres Raes: Differen Approaches o Measure Brazilian Raes Marcelo Kfoury Muinhos and Márcio I. Nakane 102 Judicial Risk and Credi Marke Performance: Micro Evidence from Brazilian Payroll Loans Ana Carla A. Cosa and João M. P. de Mello 103 The Effec of Adverse Supply Shocks on Moneary Policy and Oupu Maria da Glória D. S. Araújo, Mira Bugarin, Marcelo Kfoury Muinhos and Jose Ricardo C. Silva Dec/2004 Dec/2004 Apr/2005 Abr/2005 Abr/2005 Apr/2005 Ago/2005 Aug/2005 Aug/2005 Se/2005 Oc/2005 Mar/2006 Apr/2006 Apr/

35 104 Exração de Informação de Opções Cambiais no Brasil Eui Jung Chang e Benjamin Miranda Tabak 105 Represening Roommae s Preferences wih Symmeric Uiliies José Alvaro Rodrigues Neo 106 Tesing Nonlineariies Beween Brazilian Exchange Raes and Inflaion Volailiies Crisiane R. Albuquerque and Marcelo Porugal 107 Demand for Bank Services and Marke Power in Brazilian Banking Márcio I. Nakane, Leonardo S. Alencar and Fabio Kanczuk 108 O Efeio da Consignação em Folha nas Taxas de Juros dos Emprésimos Pessoais Eduardo A. S. Rodrigues, Vicorio Chu, Leonardo S. Alencar e Tony Takeda 109 The Recen Brazilian Disinflaion Process and Coss Alexandre A. Tombini and Sergio A. Lago Alves 110 Faores de Risco e o Spread Bancário no Brasil Fernando G. Bignoo e Eduardo Auguso de Souza Rodrigues 111 Avaliação de Modelos de Exigência de Capial para Risco de Mercado do Cupom Cambial Alan Cosme Rodrigues da Silva, João Maurício de Souza Moreira e Myrian Beariz Eiras das Neves 112 Inerdependence and Conagion: an Analysis of Informaion Transmission in Lain America's Sock Markes Angelo Marsiglia Fasolo 113 Invesigação da Memória de Longo Prazo da Taxa de Câmbio no Brasil Sergio Rubens Sancao de Souza, Benjamin Miranda Tabak e Daniel O. Cajueiro 114 The Inequaliy Channel of Moneary Transmission Mara Areosa and Waldyr Areosa 115 Myopic Loss Aversion and House-Money Effec Overseas: an Experimenal Approach José L. B. Fernandes, Juan Ignacio Peña and Benjamin M. Tabak 116 Ou-Of-The-Money Mone Carlo Simulaion Opion Pricing: he Join Use of Imporance Sampling and Descripive Sampling Jaqueline Terra Moura Marins, Eduardo Saliby and Josée Florencio dos Sanos 117 An Analysis of Off-Sie Supervision of Banks Profiabiliy, Risk and Capial Adequacy: a Porfolio Simulaion Approach Applied o Brazilian Banks Theodore M. Barnhill, Marcos R. Souo and Benjamin M. Tabak 118 Conagion, Bankrupcy and Social Welfare Analysis in a Financial Economy wih Risk Regulaion Consrain Aloísio P. Araújo and José Valenim M. Vicene Abr/2006 Apr/2006 May/2006 Jun/2006 Jun/2006 Jun/2006 Jul/2006 Jul/2006 Jul/2006 Ago/2006 Aug/2006 Sep/2006 Sep/2006 Sep/2006 Oc/

36 119 A Cenral de Risco de Crédio no Brasil: uma Análise de Uilidade de Informação Ricardo Schechman 120 Forecasing Ineres Raes: an Applicaion for Brazil Eduardo J. A. Lima, Felipe Luduvice and Benjamin M. Tabak 121 The Role of Consumer s Risk Aversion on Price Rigidiy Sergio A. Lago Alves and Mira N. S. Bugarin 122 Nonlinear Mechanisms of he Exchange Rae Pass-Through: a Phillips Curve Model Wih Threshold for Brazil Arnildo da Silva Correa and André Minella 123 A Neoclassical Analysis of he Brazilian Los-Decades Flávia Mourão Graminho 124 The Dynamic Relaions beween Sock Prices and Exchange Raes: Evidence for Brazil Benjamin M. Tabak 125 Herding Behavior by Equiy Foreign Invesors on Emerging Markes Barbara Alemanni and José Renao Haas Ornelas 126 Risk Premium: Insighs over he Threshold José L. B. Fernandes, Auguso Hasman and Juan Ignacio Peña 127 Uma Invesigação Baseada em Reamosragem sobre Requerimenos de Capial para Risco de Crédio no Brasil Ricardo Schechman 128 Term Srucure Movemens Implici in Opion Prices Caio Ibsen R. Almeida and José Valenim M. Vicene 129 Brazil: Taming Inflaion Expecaions Afonso S. Bevilaqua, Mário Mesquia and André Minella 130 The Role of Banks in he Brazilian Inerbank Marke: Does Bank Type Maer? Daniel O. Cajueiro and Benjamin M. Tabak 131 Long-Range Dependence in Exchange Raes: he Case of he European Moneary Sysem Sergio Rubens Sancao de Souza, Benjamin M. Tabak and Daniel O. Cajueiro 132 Credi Risk Mone Carlo Simulaion Using Simplified Credimerics Model: he Join Use of Imporance Sampling and Descripive Sampling Jaqueline Terra Moura Marins and Eduardo Saliby 133 A New Proposal for Collecion and Generaion of Informaion on Financial Insiuions Risk: he Case of Derivaives Gilneu F. A. Vivan and Benjamin M. Tabak 134 Amosragem Descriiva no Apreçameno de Opções Européias aravés de Simulação Mone Carlo: o Efeio da Dimensionalidade e da Probabilidade de Exercício no Ganho de Precisão Eduardo Saliby, Sergio Luiz Medeiros Proença de Gouvêa e Jaqueline Terra Moura Marins Ou/2006 Oc/2006 Nov/2006 Nov/2006 Nov/2006 Nov/2006 Dec/2006 Dec/2006 Dec/2006 Dec/2006 Jan/2007 Jan/2007 Mar/2007 Mar/2007 Mar/2007 Abr/

37 135 Evaluaion of Defaul Risk for he Brazilian Banking Secor Marcelo Y. Takami and Benjamin M. Tabak 136 Idenifying Volailiy Risk Premium from Fixed Income Asian Opions Caio Ibsen R. Almeida and José Valenim M. Vicene 137 Moneary Policy Design under Compeing Models of Inflaion Persisence Solange Gouvea e Abhiji Sen Gupa 138 Forecasing Exchange Rae Densiy Using Parameric Models: he Case of Brazil Marcos M. Abe, Eui J. Chang and Benjamin M. Tabak 139 Selecion of Opimal Lag Lengh incoinegraed VAR Models wih Weak Form of Common Cyclical Feaures Carlos Enrique Carrasco Guiérrez, Reinaldo Casro Souza and Osmani Teixeira de Carvalho Guillén 140 Inflaion Targeing, Credibiliy and Confidence Crises Rafael Sanos and Aloísio Araújo 141 Forecasing Bonds Yields in he Brazilian Fixed income Marke Jose Vicene and Benjamin M. Tabak 142 Crises Análise da Coerência de Medidas de Risco no Mercado Brasileiro de Ações e Desenvolvimeno de uma Meodologia Híbrida para o Expeced Shorfall Alan Cosme Rodrigues da Silva, Eduardo Facó Lemgruber, José Albero Rebello Baranowski e Renao da Silva Carvalho 143 Price Rigidiy in Brazil: Evidence from CPI Micro Daa Solange Gouvea 144 The Effec of Bid-Ask Prices on Brazilian Opions Implied Volailiy: a Case Sudy of Telemar Call Opions Claudio Henrique da Silveira Barbedo and Eduardo Facó Lemgruber 145 The Sabiliy-Concenraion Relaionship in he Brazilian Banking Sysem Benjamin Miranda Tabak, Solange Maria Guerra, Eduardo José Araújo Lima and Eui Jung Chang 146 Movimenos da Esruura a Termo e Criérios de Minimização do Erro de Previsão em um Modelo Paramérico Exponencial Caio Almeida, Romeu Gomes, André Leie e José Vicene 147 Explaining Bank Failures in Brazil: Micro, Macro and Conagion Effecs ( ) Adriana Soares Sales and Maria Eduarda Tannuri-Piano 148 Um Modelo de Faores Laenes com Variáveis Macroeconômicas para a Curva de Cupom Cambial Felipe Pinheiro, Caio Almeida e José Vicene 149 Join Validaion of Credi Raing PDs under Defaul Correlaion Ricardo Schechman May/2007 May/2007 May/2007 May/2007 Jun/2007 Aug/2007 Aug/2007 Ago/2007 Sep/2007 Oc/2007 Oc/2007 Ou/2007 Oc/2007 Ou/2007 Oc/

38 150 A Probabilisic Approach for Assessing he Significance of Conexual Variables in Nonparameric Fronier Models: an Applicaion for Brazilian Banks Robera Blass Saub and Geraldo da Silva e Souza 151 Building Confidence Inervals wih Block Boosraps for he Variance Raio Tes of Predicabiliy Eduardo José Araújo Lima and Benjamin Miranda Tabak 152 Demand for Foreign Exchange Derivaives in Brazil: Hedge or Speculaion? Fernando N. de Oliveira and Waler Novaes 153 Aplicação da Amosragem por Imporância à Simulação de Opções Asiáicas Fora do Dinheiro Jaqueline Terra Moura Marins 154 Idenificaion of Moneary Policy Shocks in he Brazilian Marke for Bank Reserves Adriana Soares Sales and Maria Tannuri-Piano 155 Does Curvaure Enhance Forecasing? Caio Almeida, Romeu Gomes, André Leie and José Vicene 156 Escolha do Banco e Demanda por Emprésimos: um Modelo de Decisão em Duas Eapas Aplicado para o Brasil Sérgio Mikio Koyama e Márcio I. Nakane 157 Is he Invesmen-Uncerainy Link Really Elusive? The Harmful Effecs of Inflaion Uncerainy in Brazil Tio Nícias Teixeira da Silva Filho 158 Characerizing he Brazilian Term Srucure of Ineres Raes Osmani T. Guillen and Benjamin M. Tabak 159 Behavior and Effecs of Equiy Foreign Invesors on Emerging Markes Barbara Alemanni and José Renao Haas Ornelas 160 The Incidence of Reserve Requiremens in Brazil: Do Bank Sockholders Share he Burden? Fábia A. de Carvalho and Cynia F. Azevedo 161 Evaluaing Value-a-Risk Models via Quanile Regressions Wagner P. Gaglianone, Luiz Renao Lima and Oliver Linon 162 Balance Shee Effecs in Currency Crises: Evidence from Brazil Marcio M. Jano, Márcio G. P. Garcia and Waler Novaes 163 Searching for he Naural Rae of Unemploymen in a Large Relaive Price Shocks Economy: he Brazilian Case Tio Nícias Teixeira da Silva Filho 164 Foreign Banks Enry and Deparure: he recen Brazilian experience ( ) Pedro Fachada 165 Avaliação de Opções de Troca e Opções de Spread Européias e Americanas Giuliano Carrozza Uzêda Iorio de Souza, Carlos Parício Samanez e Gusavo Sanos Raposo Oc/2007 Nov/2007 Dec/2007 Dez/2007 Dec/2007 Dec/2007 Dez/2007 Jan/2008 Feb/2008 Feb/2008 Feb/2008 Feb/2008 Apr/2008 May/2008 Jun/2008 Jul/