Inflation Targeting in Brazil: An Empirical Evaluation

Abstract

In this paper we implement some initial tests on the effectiveness of inflation targeting in Brazil. For this purpose, we use two approaches. Firstly, we estimate a Taylor style reaction function, and look for a change in relative weights of real activity and inflation terms. Secondly, we obtain two Vector Auto-Regression (VAR) models, a restricted and an unrestricted one. The two models are used to perform an out-of-sample forecasting exercise. The results, although still preliminary due to the short span of data, allow us to conclude that the initial impact of inflation targeting was positive. Our results indicate that inflation targeting was an important mechanism to keep the price stability obtained after the Real Plan, even in a sharp exchange rate devaluation context.

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