Sailing through the Global Financial Storm: Brazil’s Recent Experience with Monetary and Macro Prudential Policies to Lean Against the Financial Cycle and Deal with Systemic Risks

Abstract

Discusses how Brazil sailed through the global financial storm. The global financial crisis would provide a stressful opportunity for Brazil to put to test the policy and analytical proposals. Brazil also took measures to manage credit growth risks, appropriately introducing various macro prudential measures to contain financial risks in specific market segments. The Central Bank of Brazil has made clear that macro prudential measures are not a replacement for monetary policy action and are primarily geared at addressing financial stability risks. Brazil employed two instruments (the central bank’s base rate and a set of macro prudential tools) to address two objectives: the inflation target and a composite set of financial stability indicators. On the macro prudential side, a bias toward reducing excess credit growth and financial systemic risk requires a greater reliance on tighter regulation to reduce procyclicality. The broad direction of the new strand of literature that emerged after the crisis can be summarized in the following way: “leaning against the financial cycle” (that is, stemming excessively rapid growth in credit) can be done through a combination of monetary and macro prudential policies to avoid financial fragility and some prevention is not only recommended but achievable in an effective way.

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