Brazil through the eyes of CHORINHO

Transcription

1 Brazil hrough he eyes of CHORINHO Fabio Kanczuk FEA/USP Dep of Economics, Universiy of São Paulo April 204 Absrac CHORINHO, a medium scale DSGE model used in he financial secor o inform invesmen decisions, consiss of a small open economy version of Smes and Wouers (2007) wih a financial acceleraor mechanism, adaped for esimaion wih Brazilian daa. Marginal likelihood comparisons indicae ha he model compares favorably o Bayesian Vecor Auoregressions ha use Sims and Zha (998) priors. The model is used o (i) idenify he reasons behind recen deceleraion episodes, (ii) sudy he effecs of currency depreciaion, and (iii) invesigae wheher moneary policy has recenly become more powerful. JEL classificaion: E32, E52, F4 Keywords: DSGE, emerging markes

2 . Inroducion Suppose you are asked he quesion, How much will inflaion rise one year from now if he Cenral Bank raises he ineres rae by 25bps? And suppose your circumsance is such ha you canno avoid he quesion, ake recourse o i depends, or offer muliple answers. No bus or excuses, you mus reply wih a single number. On he qualiy of your answer hangs no only repuaion, bu money. Fuure movemens of he nominal and real ineres rae curves will prove your answer wrong or righ. One approach o formulaing an answer would be o esimae a simple Vecor Auoregression (VAR), using, for example, daa on GDP, exchange rae, inflaion, and ineres rae, and obain he impulse response. The problem wih his approach is ha you do no know how o idenify he VAR, on which you know he impulse response o depend. Resoring o a Cholesky idenificaion, and assuming an arbirary order for he variables, is one roue o an, albei fragile, answer. Bu you end up a vicim of he Price Puzzle (Sims (992)), obain an absurd resul, and he model collapses. Abandoning he VAR, you decide o imiae he Cenral Bank srucural model and esimae he simple se of New Keynesian equaions. You succeed in he IS curve, which relaes GDP o real ineres rae, bu fail in he Phillips curve. The oupu gap, obained by HP filering, is for some reason no a relevan facor wih respec o explaining inflaion. Casing abou for an alernaive, you sele on he admiedly more complicaed Dynamic Sochasic General Equilibrium (DSGE) models. DSGE models are, in fac, a srucural VAR ha use dynamic macroeconomic heory o provide he needed idenificaion. Their daa fiing is comparable o he bes VARs available, and hey provide reasonable answers o he quesions praciioners are forced o answer. I presen in his paper CHORINHO, he DSGE model I have used during he pas en years o answer quesions abou he Brazilian economy. CHORINHO is no an anagram, bu a reference o SAMBA, he Brazilian Cenral Bank DSGE model. CHORINHO ( lile lamen ) is also a Brazilian musical genre, less renowned, bu more inrospecive, shrewd, and refined han SAMBA. CHORINHO is a version of Smes and Wouers (2007) adaped o a small open economy. Preferences exhibi habi persisence, prices adjus sluggishly, and capial adjusmen coss

3 depend on lagged invesmens. I assume a fracion of he coninuum of consumpion goods o be radeables, he prices of which are deermined by he real exchange rae and inernaional commodiy prices. A subse of hese radeable goods can be impored and expored, a decision influenced by, among oher hings, world oupu. I exend he model o add an explici financial secor. As in Bernanke e al. (999), invesmens are affeced by a finance risk premium dependen on enrepreneurs leverage. To ake he model o Brazilian daa, I conduc a Bayesian esimaion. As wih Smes and Wouers (2007), he many fricions incorporaed in he model guaranee a surprisingly good fi. Marginal likelihood comparisons indicae ha he model compares favorably o Bayesian Vecor Auoregressions ha use Sims and Zha (998) priors. I use he model o exrac he shocks ha explain several episodes of growh deceleraion. I find ha (i) he energy raioning crisis of 200 is explained by a produciviy drop, (ii) he slowdown in 2003 was due o lagged effecs of he exchange rae depreciaion ha occurred during he 2002 elecions, (iii) he U.S. subprime crisis of 2008 hi Brazil hrough he credi (financial) secor, and (iv) he deceleraion during Dilma s mandae was again explained by a negaive credi shock. I hen obain he economic impacs of a hypoheical currency depreciaion. According o CHORINHO, he conracion in invesmen more han offses he improvemen in ne expors. Depreciaion hus occasions less oupu growh. I calculae as well he exchange rae passhrough, and indicae how i depends on moneary policy. Ulimaely, I use CHORINHO o invesigae he hypohesis ha moneary policy has become more powerful over ime, a common inuiion derived from he enormous credi deepening observed in Brazil over he pas decade. In fac, moneary policy effecs on oupu have srenghened, and seem o be ransmied by he financial acceleraor mechanism, ye he impac of moneary policy over inflaion has decreased over ime. Due o a Phillips curve flaening, he sacrifice raio increased considerably, a phenomenon observed in many oher economies. The res of he paper is organized as follows. In secion 2, I describe he model, in secion 3, discuss he esimaion resuls. I idenify he shocks behind recen crisis episodes in secion 4, and examine he effecs of a currency depreciaion in secion 5. In secion 6, I offer conclusions abou wheher moneary policy has become more powerful. 2

4 2. Model The economic environmen is a small open economy version of he model developed by Smes and Wouers (2007) (hereafer SW), augmened o include financial secor fricions and a simple specificaion of exernal secor and fiscal policy. I focus on he peculiariies of he esimaed model and presen is linearized form. The reader is referred o he original paper for deails. The consumpion good c is assumed o be a composie good produced wih a coninuum of differeniaed goods c(i), aggregaed in a consan elasiciy of subsiuion fashion as / σ i / σi ( c( i) ) i c =. For any given level of consumpion of he composie good, purchase of each variey of he differeniaed good mus solve he dual problem of minimizing expendiure subjec o he aggregaion consrain. From households uiliy maximizaion, he consumpion Euler equaion implies c σ h = c c σ h σ h w seady l ( σ c ) ( l σ ( σ ) p = p( i) c( i) ( σ h ) b l ) ( r π ε ), () σ ( σ ) seady seady c c h c h where c is aggregae consumpion, l is labor, r is nominal ineres rae, π is inflaion, and ε b, because i affecs he effecive ineres rae (for deails and some micro-foundaions, see Kanczuk (203)), can be hough of a credi shock over households. The parameer σ h measures habi persisency, σ c governs ineremporal subsiuion elasiciy, and w seady, l seady, and c seady are seady sae values of wage, labor, and consumpion, respecively. I assume a fracion ( in comm ) of he differeniaed goods o be radeable and heir prices o be exogenously deermined. The fracion in corresponds o ypical inernaional goods, he inernaional prices of which are deermined by some inernaional consumer price. When expressed in domesic currency, he prices are equal o p e, where p is he aggregae price level and e he real exchange rae. The fracion comm corresponds o commodiies goods, he prices of which are governed by an inernaional commodiy price. i 3

5 In domesic currency, he prices are equal o p e cry, where cry is he price of commodiies (in dollars). The remaining ( - in - comm ) goods are produced by monopolisic firms. A subse of hese radeable goods is impored. Euler equaions imply ha impors of (ypical) consumpion goods and commodiy goods are proporional o [c - σ i e ] and [c - σ i (e cry )], respecively. Bu one mus consider as well impors of invesmen goods, which are subjec o an equivalen dual problem of expendiure minimizaion subjec o he aggregaion consrain. Taking ino accoun hese consideraions, oal impors m are given by m m = µ cc µ ii µ ee µ cry cry ε (2). Due o price sickiness, a mass fix of he monopolisic firms canno opimize prices in each period, occasioning parial aion. Prices hus adjus only sluggishly o heir desired mark-up and, under he usual simplifying assumpions, firms price seing opimizaion problem gives rise o he following New-Keynesian Phillips curve (see he appendix for deails), π π = [ βπ lagπ mc mc e ( e βe ) cry ( cry βcry )] ε, (3) β lag where π denoes inflaion, e is he real exchange rae, cry is a commodiy price (prices of he commodiies in dollars), β is he ineremporal discoun facor, lag is he parial aion coefficien, mc is he real marginal cos of producion, and ε π is a cos push shock. The oupu of each differeniaed good is produced using capial and labor services according o a Cobb-Douglas echnology. To produce, firms ren capial and labor services from a cenralized marke ha requires his facor of producion o be readily reallocaable across indusries. Because all firms face he same facor prices, and all have access o he same producion echnology wih consan reurns o scale, he capial-labor raio and marginal cos are idenical across firms, and given respecively by and k v = l w (4) mc = αv ( α) w ε, (5) a where k denoes (aggregae) capial and l (aggregae) labor, and ν is he capial marginal produc, w he labor marginal produc (wage rae), ε a he produciviy, and α he capial share parameer. Assuming disorions due o price dispersion o play a negligible role, aggregae producion is given by 4

6 y = ε αk ( α) l. (6) a Reurning o he households problem, he Euler equaion for labor implies σ h w τ = σ ll c c seady, (7) τ σ h σ h where τ is he ax rae over labor. I assume axes are levied on he households, boh on labor and capial, a he same rae. To specify he dynamics of invesmens, I follow De Graeve (2008) in using he financial acceleraor formulaion of Bernanke e al. (999) o append financial fricions o he model. As in hese models, he capial adjusmen cos depends on he flow of invesmen, and he invesmen Euler equaion is given by i β β β ( β ) ϕ = i i q, (8) where i denoes invesmen, φ is a capial adjusmen cos parameer, and q is he price of capial. The capial law formaion is given by k = ( δ ) k δi, (9) where δ denoes he depreciaion rae. As in Bernanke e al. (999), here is an enrepreneurial secor ha buys capial a price q and uses i in producion in he following period, receives he proceeds (he marginal produc of capial) from operaing he capial, and resells a price q. The capial arbirage equaion ha describes he enrepreneur problem is given by k, seady k = q k seady v k seady τ,, seady r r δ δ r r δ τ q, (0) where r k denoes reurn o capial and r k,seady is is seady sae value. In each period, enrepreneurs have ne worh given by n, which hey use o parly finance heir capial expendiures. The exisence of a cosly sae verificaion problem beween hem and he financial inermediaries gives rise o an exernal finance premium, a wedge beween he expeced reurn of capial and expeced reurn demanded by households ψ, given by k ψ r ( r π ). () = The presence of financial fricions implies ha he size of his premium is posiively relaed o he enrepreneur leverage, ψ = χ n q k ), (2) s ( 5

7 where χ s is a coefficien ha measures he elasiciy of he premium o leverage. The evoluion of he enrepreneurs ne worh is given by n k n k n ( ε, (3) n seady seady k = r )( ψ seady seady r π ) χ nn where χ n is he survivorship rae and ε n a financial secor shock. Firms sell a porion of he goods abroad. By symmery, he demand for he home counry s expors is given by he impors of he oher counries. As a consequence, expors x are given by x = κ world κ e κ cry ε, (4) world e cry x where κ, κ 2, and κ 3 are deermined by seady saes and consumpion shares of he imporer counry consumers and commodiy conen of he home good oupu, world is a measure of he imporers oupu, and ε x is a shock. Governmen chooses nominal ineres rae r according o a Taylor rule, r r = γ rr γ π π γ exp ecπ γ y y ε, (5) where γ s are parameers and ε r is a moneary shock. Governmen budge consrain deermines he amoun of ransfers T, as a fracion of oupu, according o seady T = τ s g g y ), (6) ( where s is governmen primary surplus expressed as a fracion of oupu and g governmen spending. The sandard goods marke equilibrium condiion is y seady seady seady seady seady = c c i i x x m m g g, (7) where enrepreneurs consumpion is implicily assumed o be negligible. To close he model, I specify he sochasic processes of he exogenous disurbances as: b b b = ρbε ξ ε (8) a a a = ρaε ξ ε (9) g g g = ρ gε ξ ε (20) r r r = ρ rε ξ ε (2) ε ρ ε ξ ρ ξ π π π 2 π = π π (22) n n n = ρnε ξ ε (23) 6

8 ε = ρ ε ξ (24) x x x x ε = ρ ε ξ (25) m m m m 2 cry e e = ee ρe ξ ξ ρ (26) cry ρ (27) cry = cry cry ξ world ρ, (28) world = world world ξ τ τ = ρττ ξ (29) = ρ ξ (30) s s s s where all ξ are i.i.d. normal error erms wih zero mean and well defined variances. Noe ha all bu wo are simple auoregressive processes. For he cos push, as in SW, I add a moving average componen, and for he exchange rae add a erm ha capures he effec of he commodiy price disurbances, a sylized fac ha is well documened (e.g., Rogoff e al. (2008)). I ried many oher specificaions of shocks, among hem, posulaing commodiy prices o be a funcion of world GDP, governmen expendiures o depend on produciviy, and produciviy o depend on world oupu. All urned ou o have a poor fi. A more subsanive poin, implici in he shocks specificaion, concerns he exogenous process for he real exchange rae. In small open economy models, which ypically have an inernaional deb level equaion and are closed using an assumpion such as an inernaional ineres rae elasic o deb (see Schmi-Grohe and Uribe (2003)), he real exchange rae can be exogenously deermined hrough an ineres pariy condiion. Our model direcly specifies he exchange rae as an exogenous variable, a modeling choice ha reflecs he fac ha he ineres pariy condiion is known o perform poorly in deermining exchange rae. 3. Esimaion I use quarerly daa from 999:2 o 203:4 obained from he Brazilian Cenral Bank (bcb.gov.br) and Brazilian Insiue of Geography and Saisics (ibge.gov.br), from which deailed informaion is available. I resric he daase o his period because he Brazilian exchange rae devaluaed sharply a he beginning of 999 due o a balance of paymen crisis. In he wake of his episode, Brazilian macroeconomic policies became reasonably sable and 7

9 followed an Inflaion Targeing regime, making he esimaion more reliable (as quarerly daa is available only afer 996, his assumpion enails no imporan loss of informaion). I esimae he model using 4 series: Oupu, Consumpion, Invesmen, Employmen, Overnigh Ineres Raes (Selic), Inflaion (IPCA), Expors, Impors, Real Exchange Rae (calculaed using he Brazilian and U.S. CPIs), cry (from Bloomberg), Inflaion Expecaions, Governmen primary surplus, Governmen revenues, and U.S. GDP (which plays he role of world ). Relaive o SW, differences in daa availabiliy call for some adapaion of he esimaion. There being, for example, no series on hours worked in Brazil, I use employmen daa, relaing hours worked o employmen by means of he equaion l = σ employmen, employ where σ emply is a parameer o be esimaed. Similarly, because Brazilian daa on wages covers only he pos-2004 period and seems exremely volaile, I oped no o use i, as a consequence of which I find ha i is no necessary o assume wage sickiness o improve fi. I also find choice of capial uilizaion o no be an imporan device for improving model fi, a resul already obained by SW, and because Brazil lacks daa on durables consumpion, and I canno follow he procedure of adding hose o he invesmen series, I insead posulae he observed consumpion o be a weighed average of durables and nondurables, he laer o be proxied by invesmens. In pracice, I posi he observed consumpion series o be given by c observable = ( σ ) c σ i, durable durable where σ durable is a parameer o be esimaed. Because Brazil does have very good daa on inflaion expecaions (colleced by he Cenral Bank, Focus ), I use i in place of π whenever i appears in he model equaions. I add for hese expecaions and heir disurbance he following respecive equaions, π = π π ε and (33) exp ec backward exp exp exp = exp ec forward exp ε ρ ε ξ. (34) No surprisingly, I find his specificaion choice o improve he esimaion. Six of he esimaion parameers are fixed because hey are eiher difficul o esimae wih available daa or unidenified. The depreciaion rae is fixed a δ = 0.025, he GDP raio ha corresponds o governmen expendiures, and expors and impors are se o g seady = 0.20, x seady 8 (3) (32)

10 = 0.4, and m seady = 0.3, based on he averages of he corresponding daa. The leverage and enrepreneur survivor rae are se a k seady /n seady =.2 and χ s = The definiion of he priors and resuls of he esimaion for he main parameers are repored in Table I. I compare in Table II he marginal likelihood of CHORINHO wih ha of BVARs, which uses he Sims and Zha (998) priors, esimaed wih he same 4 variables over he full sample. The resuls sugges ha CHORINHO s predicion performance compares favorably wih ha of BVARs. 4. Idenifying Crisis Episodes I use he model o exrac, by calculaing he oupu when only one of he esimaed shocks is presen, he deerminans of he five Brazilian crises ha occurred over he course of he pas decade. The welve shocks in CHORINHO appear in equaions (7) o (27) and (29), and are relaed o disurbances ha occur in (i) households credi, (ii) echnology (Solow residual), (iii) governmen expendiure, (iv) moneary policy (deparure from Taylor rule), (v) inflaion (cos-push), (vi) firms credi (ne worh), (vii) expors, (viii) impors, (ix) exchange rae, (x) commodiies, (xi) world economy (U.S. GDP), (xii) inflaion expecaions, (xiii) surplus, and (xiv) axes. Figure displays Brazilian GDP growh, calculaed as quarer over same quarer of he previous year. Over he horizon sudied, Brazilian GDP had five imporan drops. I associae each episode wih is causes, and repor he shocks ha were mos imporan according o he model. The firs episode, from 2000:Q4 o 200:Q4 is readily associaed wih he elecrical energy raioning ha occurred during he second half of 200. Lack of waer in he hydroelecric reservoirs found households and firms resriced in he use of energy or heavily axed. According o he model, abou 2% of he 3% GDP drop during ha period was due o a produciviy shock, ha is, 65% of wha happened can be explained by produciviy. This is somewha comforing, lack of energy being, in fac, akin o a produciviy drop. The second episode is also readily associaed wih an hisorical fac. During 2002, invesors considered he possibiliy ha Lula, he Workers Pary candidae who had once argued in favor of defauling on he exernal deb, would win he presidenial elecion. When his scenario became mos likely (a he beginning of Augus), fear of defaul dominaed he markes 9

11 and he exchange rae depreciaed by abou 60%. Ineresingly, GDP dropped only laer, during he firs half of 2003, when he exchange rae was already appreciaing and reurning o is previous value. According o he model, 75% of he 2.7% decline in GDP was due o an exchange rae shock. Depreciaion of he exchange rae booss inflaion and expecaions hereof, in response o which he Cenral Bank elevaes ineres raes, all of which has he collaeral effec of causing a conracion in GDP. This process akes ime, which explains why he effecs of he depreciaion peak wih a lag of four quarers. The hird episode, in 2005, can be associaed wih an exraordinary moneary ighening in he sense ha ineres raes were much higher han dicaed by he esimaed Taylor rule. A he ime, Cenral Bank Direcor Bevilaqua decided o break he spine of inflaion by raising he Selic rae o 9.75%, which reduced welve monh inflaion from 8% o 3%. CHORINHO suggess ha 00% of he.7% GDP drop can be fully aribued o a moneary shock. The 7.4% GDP drop in he fourh episode, he subprime crisis, was larger and more acue han he drops observed in he oher episodes. According o he model, 42% of i was due o a credi shock ha hi firms. Also relevan were drops in expors, which accouned for 5% of he oal drop. CHORINHO suggess, however, ha he ransmission mechanism of he crisis was more finance han rade, and hus corroboraes Eaon a al. s (20) discussion of he grea recession. Tha CHORINHO s idenificaion of hese four episodes largely coincides wih he resuls of oher models (Kanczuk (203)) is comforing, bu perhaps makes he findings less ineresing. The final and mos recen episode of deceleraion, discussed below, has o my knowledge no been he objec of formal invesigaion hus far. The Brazilian economy suffered a fairly large and proraced deceleraion from he middle of 200 o he middle of 202, he reasons for which are sill very much a opic of debae. Many alernaive explanaions have been advanced, among hem, (i) Dilma s micro-managemen of economic policy (i.e., subsidies and axes o help paricular firms and secors, manipulaion of prices o conrol inflaion, ec.), (ii) he end of he commodiy boom, and (iii) a reducion in labor supply, as evidenced by he reducion in unemploymen. Figure 2 depics he decomposiion of he oupu flucuaion, ha is, which shocks caused he observed oupu level. Oupu level being repored as he deviaion from he HP filer rend, i corresponds o he high frequency (or real business cycle) componen of he series. According o 0

12 CHORINHO, he main facors behind his crisis are relaed o households credi and firms credi. Moneary policy sands ou as he facor in he oher direcion; growh would be much worse wihou he moneary simulus. Produciviy and commodiies, he usual suspecs implicaed in growh deceleraion, urn ou o be almos irrelevan during his period. The oher suspec, reducion of he labor force, is a low frequency phenomenon ha should disappear once daa is filered. This surprising resul warrans furher invesigaion. Validaing he conclusions by looking a credi informaion, as in Kanczuk (203), would no be an easy ask because informaion began o be arificially affeced by governmen policy as privae banks were forced o reduce spreads. Daa on he volume of credi ends o be grealy lagging wih respec o GDP, and suffered a recen mehodology break. A quick look suggess ha, whereas oal credi performed reasonably well, credi provided by privaely owned banks collapsed during his period. Bu i is no obvious why one ype of credi should be much more relevan han he oher. I leave i o furher research o shed more ligh on why Brazil suffered such srong deceleraion during Dilma s Governmen. 5. Effecs of a currency depreciaion The impac of he exchange rae on he Brazilian economy is ofen a source of heaed debae among governmen officials, indusry represenaives, and marke economiss. Currency depreciaion is argued o be good for he economy because i helps o increase expors and decrease impors. This simple rade argumen ofen underlies he currency war discussion and need o proec naional indusry. Many economiss couner ha because he Brazilian producion sysem is heavily based on impored machinery, depreciaion may be bad for growh. The argumen ha currency depreciaion makes machinery expensive, which ends up reducing invesmens, is commonly known as he Pasore effec (afer economis Affonso Celso Pasore). Anoher debae relaed o currency depreciaion concerns is effecs on inflaion and ineres raes, in financial marke and Cenral Bank parlance, he pass-hrough and appropriae moneary response o avoid second order inflaion effecs. Undersanding he impacs of depreciaion beer han he res of he marke is he basis for he design of profiable rading sraegies.

13 In his secion, I use CHORINHO o evaluae hese argumens. I examine in paricular he impulse response of a currency depreciaion over many macro variables, and aemp o quaniaively evaluae he meris of he argumens. I menion as a cavea ha, as noed above, he use of an exogenous sochasic process o deermine he nominal exchange rae in CHORINHO precludes an inerpreaion of wha caused he depreciaion. Figure 3 shows he impac of a 0% currency depreciaion over several macro variables. Noe ha, as expeced, expors reac posiively and impors negaively o he currency depreciaion. Thus, he rade argumen, usually advanced by FIESP (an indusry associaion), poenially has some validiy. Depreciaion also, however, affecs he price of capial and reduces invesmen, bu for reasons differen from hose proposed by Pasore. In CHORINHO, depreciaion creaes inflaion, which calls for higher ineres raes. This, in urn, reduces he price of capial, which is why invesmen falls. According o CHORINHO, he drop in invesmen more han offses he gain in ne expors, and he oal effec of depreciaion on oupu is negaive; 0% depreciaion reduces oupu by abou 0.3%. In his sense, in his model, depreciaion is bad for he economy. I nex use CHORINHO o calculae he exchange rae pass-hrough on inflaion. Figures 4a and 4b show he impac of 0% depreciaion on ineres (Selic) and inflaion (IPCA). In figure 3b, I used insead of he esimaed CHORINHO a model in which he Taylor rule is arbirarily calibraed. Tha is, figure 3b corresponds o a model in which all equaions are exacly equal o CHORINHO equaions, save (5), he parameers of which are exogenously chosen and equal o γ π =.5 and γ r = γ expec = γ y = 0. The raionale for his experimen is o show pass-hrough o be heavily dependen on Cenral Bank policy, a reincarnaion of he infamous Lucas Criique. In oher words, passhrough is no a deep parameer and canno really be esimaed. In figure 3a, in which he Cenral Bank reacs o he depreciaion by raising Selic by abou 00bps, he pass-hrough is abou 8% (i.e., inflaion goes up by 0.8%). Were he Cenral Bank o reac differenly, say, by raising he Selic by 55bps, he pass-hrough would become 0%. A curious poin abou figure 4b is ha he real ineres rae is always negaive and inflaion neverheless converges o zero. This apparen conradicion is possible because he model was solved by assuming ha he Cenral Bank reacs aggressively o inflaion (he 2

14 inflaion coefficien in he Taylor rule is greaer han ). Thus, insofar as he Cenral Bank s reacion is deemed sufficienly ough, agens inflaion expecaions will bring inflaion back o he equilibrium regardless of he acual real ineres rae. 6. Changes in Moneary Policy Power Tha credi as a percenage of GDP grew from 24.7% o 55.2% from 2003 o 203 is perhaps he mos imporan ransformaion in he Brazilian economy during he pas decade. Lile is known abou he macroeconomic impac of his change, bu i is reasonable o suppose ha i has quaniaively affeced he ransmission mechanism of many shocks. In paricular, i is ofen argued ha i affeced he power of moneary policy. I use CHORINHO o invesigae his claim, using exacly he same specificaion as before, bu esimaing he model using only a subse of he daa consising of he firs half of he horizon. Tha is, I esimae he model using only daa from 999:3 o 2006:3 and conras he resuls wih he previous resuls. Noe ha I do no propose using he esimaion exclusively of he laer par of he sample (from 2006 o 203). This is because, afer many aemps, I found his esimaion o be exremely problemaic. I usually resuled in he non-convergence of he compuaional procedures or in soluions ha did no correspond o he maximum of he likelihood funcion. A possible reason for his was he inensiy of he grea recession, which dominaed he years 2008 o 2009, generaing exreme oucomes. The difficuly of esimaing he model over shor periods of ime is a reason o view he resuls wih some skepicism. Figures 5a o 5e show he impac of raising he nominal ineres rae (Selic) by 00bps during one year. Each figure plos wo curves obained by he model, he blue esimaed wih he full sample, he red wih he firs par of he sample. Figure 5a shows GDP level. Noe ha, as argued, he oupu impac of moneary policy became more powerful over ime. Figure 5b, however, which depics inflaion, indicaes ha his addiional power was no relevan where i really maers. Tha is, moneary policy became more desrucive o growh, bu is power o affec inflaion, is main objecive, diminished. Before invesigaing furher wha is behind his resul, i is useful o obain he sacrifice raio implied by figures 5a and 5b. For ha I calculae he raio of oal oupu los in he period consequen o he reducion in inflaion. I find he sacrifice raio of moneary policy in he firs 3

15 years o be 0.8, and when he enire sample is used o be much higher a 2.8. These numbers can be compared o heir inernaional counerpars, found by Ball (994) o range from 0 o 3.6, wih an average of.4. Thus, nowihsanding significan changes over ime, he Brazilian numbers seem reasonably wihin range. One hypohesis for he increase in he sacrifice raio is ha over ime he Cenral Bank became more complacen wih inflaion. As inflaion expecaions are affeced by Cenral Bank policy, and inflaion is affeced by inflaion expecaions, his would reduce he impac of an economic conracion on inflaion. However, according o CHORINHO he Taylor rule parameers did no change maerially over ime. In oher words, my esimaion does no sugges ha Cenral Bank policy changed, a leas wih respec o he mean. (I is possible ha he mean inflaion arge changed, bu ha does no affec he esimaion.) The righ answer, however, is ha he Phillips (equaion (3)) became flaer, he oupu gap parameer mc esimaion mode changing from o Ineresingly, his phenomenon seems o be happening in many counries (see IMF (203) and references herein). Wih respec o he effec of moneary policy on growh, figures 5c and 5d repor he impac of higher ineres raes on consumpion and invesmen. Noe ha, whereas consumpion is lile affeced, invesmen suffers a large drop when he full sample is used in he esimaion. This indicaes ha he change did no happen in he dynamic IS curve (equaion ()), bu somewhere in he credi ransmission o firms (equaion (8)). When I invesigae where he change was wihin he credi ransmission channel, I find no specific reason ha sands ou. Differen esimaion samples imply small changes in mos of he parameers in equaions (8), (0), (), (2), and (3), bu nohing in paricular ha commands aenion. I seems ha he accumulaion of many small changes hroughou he financial acceleraor mechanism exers a large oal effec on invesmens. As one example, in figure 5e I depic he impac on he price of capial q, which has been fairly large in recen years. 7. Conclusions I look a he Brazilian economy cycles since 999 hrough he lense of CHORINHO, a DSGE model consruced and esimaed for Brazil. The model is used o provide insigh o he following quesions: () Wha caused a paricular deceleraion? (2) Wha is he inflaion passhrough of he exchange rae? (3) How effecive is moneary policy? 4

16 CHORINHO, in fac, provides some quaniaive answers o hese quesions. Bu perhaps more ineresing han he answers are he mehodology and rigor behind hem. The use of DSGE forces one o hink in erms of exogenous shocks and endogenous responses, and hus o ask sensible quesions. I helps us idenify he deep parameer and no be fooled by supposed ones ha are, in fac, vulnerable o he Lucas criique. And i provides a mehodology for esing quaniaive hypoheses. 7. References Ball, L. (994) Wha Deermines he Sacrifice Raio? in Moneary Policy, ed. by N. Mankiw, The Universiy of Chicago Press, Bernanke, B. S., M. Gerler and S. Gilchris (999) The Financial Acceleraor in a Quaniaive Business Cycle Framework, in The Handbook of Macroeconomics ed. by J. B. Taylor and M. Woodford, pp , Elsevier Science B.V., Amserdam. De Graeve, F. (2008) The Exernal Finance Premium and he Macroeconomy: U.S. Pos-WWII Evidence, Journal of Economic Dynamics and Conrol 32: Eaon, J., S. Korum, B. Neiman and J. Romalis (20) Trade and he Global Recession, NBER Working Paper Inernaional Moneary Fund (203) The Dog ha Didn Bark: Has Inflaion Been Muzzled or Was I Jus Sleeping? Chaper 3 of World Economic Oulook, April 203. Kanczuk, F. (203) Um Termomero para as Macro-Prudenciais, Revisa Brasileira de Ecconomia 27 (4): Rogoff, Kenneh, Barbara Ross and Yu-Chin Chen (2008) Can Exchange Raes Forecas Commodiy Prices? NBER Working Paper w390. Schmi-Grohe S. and M. Uribe (2003) Closing Small Open Economy Models, Journal of Inernaional Economics 6: Sims, C. A. (992), Inerpreing he Macroeconomic Time Series Facs: The Effecs of Moneary Policy, European Economic Review 36: Sims, C. A. and T. Zha (998) Bayesian Mehods for Dynamic Mulivariae Models, Inernaional Economic Review 39 (4):

17 Smes, F. and R. Wouers (2007) Shocks and Fricions in US Business Cycles: A Bayesian DSGE Approach, American Economic Review 97 (3): Appendix: Modified Phillips Curve The Phillips Curve equaion blends firms price seing equaions wih an aggregae price equaion. In he economy, firms price seing equaions are sandard, bu he aggregae price equaion is ransformed o include aion, inernaional prices, and commodiies. To clarify, le us consider firs he case wih neiher aion nor commodiies. In his siuaion, he linearized equaion for he aggregae price level is p = p, in * in ( p E ) ( in ) p where he fracion of prices canno be changed in he period, he fracion in of prices is linked o inernaional prices, and p denoes he aggregae price, which is an average of (i) he previous period prices (hose ha canno be changed in he presen period), (ii) he inernaional prices p in expressed in local currency using he nominal exchange rae E, and (iii) he prices ha change during he presen period p *. Noe ha his equaion subsiues for he more usual, closed economy equaion, p = p. Plugging in he definiion of real exchange * ( ) p rae, e, which is given by p in E = p e, he equaion can be ransformed o π = ( e. * in )( p p ) in As noed above, firms price seing equaions are sandard, and given by p * p * = ( β ) mc π β ( p p ), where π denoes inflaion and mc he marginal cos. One obains from hese wo equaions he following Phillips curve: π β in fix fix fix in = ( e βe ) π mc. fix in fix in ( in ) ( β )( To include commodiies, he aggregae price equaion is generalized o ) p in in * = p in ( p E ) cry ( p E cry ) ( in cry ) p, where cry denoes he price of commodiies in dollars. Including he aion facor in firms price seing equaions yields he more general Phillips curve, 6

18 7 = ) ( ) )( ( ) ( ) )( ( ) ( in in in in comm fix comm fix comm cry cry e e β β β β π in in ) )( ( ) )( ( comm fix fix comm fix π ϑ β β π β comm fix comm fix fix mc π ε β β ) )( ( ) )( ( in in.

19 Table : Esimaion Resuls Parameer Prior Mean Poserior Mean Confidence Inerval Prior Shape Prior S.D. σ c Normal 0.5 σ h Bea 0. σ l Normal 0.5 σ durable Normal 0.2 σ employ Normal (/β-) Gamma 0. α Normal 0.05 φ Normal.5 lag Bea 0. mc Normal 0.2 e Normal 0.2 cry Normal 0.2 backward Normal 0.2 forward Normal 0.2 χ s Normal 0.2 µ i Normal 0.2 µ e Normal 0.2 κ world Normal 0.5 κ e Normal 0.2 κ cry Normal 0.2 γ r Bea 0. γ π Normal 0.2 γ exp Normal 3.0 γ y Normal 0.05 Table 2: Marginal Likelihood Comparison Order of BVAR Marginal Likelihood BVAR() BVAR(2) BVAR(3) BVAR(4) BVAR(5) BVAR(6) BVAR(7) BVAR(8) CHORINHO

20 Figure :Crisis Episodes Figure 2: Dilma s Micro-Managemen 9

21 Figure 3: FIESP versus and Pasore Figure 4a: Pass-hrough and Moneary Policy Figure 4b: Pass-hrough wih Alernaive Taylor Rule 20

22 Figure 5a: Moneary Policy Power GDP Figure 5b: Moneary Policy Power Inflaion Figure 5c: Moneary Policy Power Consumpion 2

23 Figure 5d: Moneary Policy Power Invesmen Figure 5e: Moneary Policy Power Ne Worh 22