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Brazilian Disinflation Process: Costs and Implications - Tombini & Alves (2006)

Explore the recent Brazilian disinflation process from 2002 to 2006, analyzing changes in underlying inflation, costs of disinflation, and the impact on monetary policy. The paper discusses inflation shocks, disinflation trends, and the associated costs over the years. It delves into key factors influencing inflation expectations, foreign inflation pass-through effects, and structural breaks in the Phillips curve. Insights into the disinflation costs and implications for market behavior are highlighted.

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Brazilian Disinflation Process: Costs and Implications - Tombini & Alves (2006)

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  1. The recent Brazilian disinflation process and costs Alexandre A. Tombini Background paper: Tombini and Alves (2006) April 2006

  2. Summary of Presentation • 2002 inflation shock; • disinflation process 2003-2006; • changes in the underlying inflation process; • cost of disinflation.

  3. 12.5 9.3 7.6 % 5.7 2002 2003 2004 2005 IPCA Inflation 3.5 3.0 2.5 2.0 % 1.5 1.0 0.5 0.0 -0.5 Jan 02 Jul 02 Jan 03 Jul 03 Jan 04 Jul 04 Jan 05 Jul 05 Jan 06

  4. Inflation and Targets 18 16 12-Month Cumulative IPCA 14 Consensus 12 Adjusted Target 10 % 8 6 4 2 0 Jan Jan Jan Jan Jan Jan Jan Jan 07 00 01 02 03 04 05 06

  5. Monetary Policy

  6. 12-Months Ahead Inflation Expectations

  7. 12-Month GDP Growth

  8. changes in the underlying inflation process • persistence • forwardlookingness • passthrough • slope of the PC

  9. 12-Month Consumer Inflation (IPCA)

  10. Weights in IPCA

  11. The Model • Hybrid Phillips curve • Time-varying coefficients (Kalman filter) • Verticality constraint • Monthly frequency

  12. Persistence and Inflation Expectations

  13. Foreign Inflation Pass-through and Output Gap Coefficients

  14. Summary of Structural Breaks • Inflation persistence: falls markedly with implementation of IT and enhanced credibility (1999-2000), but increased with the 2002 confidence crisis; • The forward-looking term has slightly lost its importance at the end of 2002; • The pass-through coefficient has permanently increased since mid 2002; • The Phillips curve became flatter from mid 2002 on. • == increased cost to disinflate after the 2002 shock

  15. Disinflation Costs • Conter factual analysis for free market inflation, seasonally adjusted. • Rational expectation simulation, maintaining the occurred paths for : • interest rates, output gap, nominal exchange rates, monitored inflation and exogenous shocks (recovered by an iterative approach) • Inflation cost of about 6 percentage points per year (20 percentage points)

  16. Concluding Remarks • perception that “policy discontinuity” could occur, even though not confirmed ex-post, triggered a change in the way firms and households behave in their pricing and consuming decisions. • leading to structural breaks in the parameters of a generalized hybrid Phillips curve. • Increased disinflation costs: • Accumulated in 20 percentage points from July 2002 to December 2005; • It implied a 6 percentage points cost, on average, per year

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