Transcript Inflation targeting - Banco Central do Brasil

Banco Central do Brasil
Inflation Targeting in Brazil
Ilan Goldfajn
February 2002
1
Brazilian IT Framework
• Implementation in July 1st, 1999
• Headline IPCA was chosen
• Targets were 8%, 6% and 4% for 1999, 2000 and
2001, with a ± 2% tolerance interval
• Targets are 3.5% for 2002 and 3.25% for 2003, with
a ± 2% tolerance interval
• Absence of escape clauses
2
Inflation in Brazil - IT Regime
Annual IPCA X Targets
8.94
8.00
7.67
6.00 5.97
4.00
1999
2000
3.50
2001
Target
2002
3.25
2003
IPCA
3
12-month IPCA X Targets
Inflation Rate - IPCA (% over year ago)
10%
8%
6%
8.00
6.00
4%
2%
7.62
4.00
Inflation Targeting
3.50
0%
Jan-97 Jul-97 Jan-98 Jul-98 Jan-99 Jul-99 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02
Dotted lines represent the inflation targets for 1999, 2000, 2001 and 2002
4
IPCA and Exchange Rate
100
16
80
14
12
60
10
40
8
20
6
0
4
Jan-02
Nov-01
Sep-01
Jul-01
May-01
Mar-01
Jan-01
Nov-00
Sep-00
Jul-00
May-00
Mar-00
0
Jan-00
-40
Nov-99
2
Sep-99
-20
Exchange Rate t-3 (3-month annualized accumulated variation; left scale)
IPCA t (3-month annualized accumulated variation; right scale )
5
Interest Rate
Over-Selic Rate
(daily figures: January 4, 1999 to February 26, 2002)
50
45%
% p.y.
40
30
18.80
20
10
Jan
99
May
Sep
Jan
00
May
Sep
Jan
01
May
Sep
Jan
02
6
Inflation Targeting Regime:
Practical Issues
– To Core or not to Core
– Supply versus Demand Shocks (expected supply
effect?)
– Transparency Issues
– Different expectations from market’s
7
Macroeconomic Models
• Instrumental for managing monetary policy under IT
• Powerful tool for communicating monetary policy
(inflation fan charts)
8
Monetary Policy Decision Process
• Use the broadest information set as possible.
• Judgmental analysis is very important.
• Use macro models to discipline and make discussion
more rigorous.
• Use several models to check consistency, but choose
the main one.
10
Forecasting Process
• Scenarios
– Model specification
• The Copom defines which relations are relevant for the
monetary policy decision.
– Exogenous variables
• The most likely path for the exogenous variables are set
by the Copom after interacting with the staff.
– Shocks
• The timing, magnitude, variance and skewness are set
by the Copom after interacting with the staff.
11
Forecasting Tools
• Small-scale macroeconomic models
• VARs models
• Leading Indicators
• Core inflation
12
VAR Models for Short-run
Inflation Forecasting
• Objective: provide short-run forecasts for the structural
model
• Endogenous variables: interest rate, exchange rate,
money, GDP, industrial production, unemployment and
construction price index
• Sample: post Real Plan
• Frequency: monthly and quarterly
13
Leading Inflation Indicators
• Composite index built as a combination of economic variables
that show leading relation to inflation.
• The methodology used to combine the economic series extracts
their common movements related to inflation process.
• The main objective is to predict turning points of inflation in real
time.
• Also provides linear forecast using a VAR system combining the
index with inflation.
• Components follow a general pattern: monetary, real sector,
financial and external shocks variables.
14
Leading Indicators
0.015
3
2
0.010
1
0.005
0
0.000
-1
-0.005
-0.010
98:01
-2
-3
98:07
Inflation
99:01
99:07
Indicator 1
00:01
Indicator 2
15
Core Inflation
• Broad consumer price index (IPCA) - 52 components
(items)
• Trimmed-mean with smoothing items
• Trim 20% of each tail to minimize the difference with a
13-month centered moving average of inflation
16
IPCA and Core Measure
IPCA and core measure - monthly changes
1.3
0.9
0.5
0.1
-0.3
IPCA
Core
Jul 00
Apr 00
Jan 00
Oct 99
Jul 99
Apr 99
Jan 99
Oct 98
Jul 98
-0.7
Apr 98
0.31
0.61
0.42
0.43
0.24
0.24
0.31
0.43
0.40
0.68
0.46
0.58
0.48
0.44
0.37
0.45
0.35
0.42
0.58
0.60
0.42
Jan 98
0.70
1.05
1.10
0.56
0.30
0.19
1.09
0.56
0.31
1.19
0.95
0.60
0.62
0.13
0.22
0.42
0.01
0.23
1.61
1.31
0.23
Oct 97
Jan 99
Feb 99
Mar 99
Apr 99
May 99
Jun 99
Jul 99
Aug 99
Sep 99
Oct 99
Nov 99
Dec 99
Jan 00
Feb 00
Mar 00
Apr 00
May 00
Jun 00
Jul 00
Aug 00
Sep 00
Jul 97
Core
Apr 97
IPCA
Jan 97
Period
17
IPCA and Core Measure
IPCA and core measure - 12-month changes
Period
IPCA
Core
10.0
9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
IPCA
Jul 00
Apr 00
Jan 00
Oct 99
Jul 99
Apr 99
Jan 99
Oct 98
0.0
Jul 98
1.97
2.19
2.20
2.45
2.46
2.56
2.69
3.19
3.55
4.19
4.67
5.22
5.40
5.21
5.16
5.18
5.29
5.49
5.77
5.96
5.98
Apr 98
1.65
2.24
3.02
3.35
3.14
3.32
4.57
5.69
6.25
7.50
8.65
8.94
8.85
7.86
6.92
6.77
6.47
6.51
7.06
7.85
7.77
Jan 98
Jan 99
Feb 99
Mar 99
Apr 99
May 99
Jun 99
Jul 99
Aug 99
Sep 99
Oct 99
Nov 99
Dec 99
Jan 00
Feb 00
Mar 00
Apr 00
May 00
Jun 00
Jul 00
Aug 00
Sep 00
Core
18
General Structure of Models
Other
determinants
Fiscal
Variables
Risk Premium
UIP
IS
Aggregate
Demand
Exchange Rate
IS
Phillips
UIP
Inflation
Interest Rate Rules /
Exogenous Path
Interest Rates
19
Building Blocks
• Demand (IS Curve)
• Supply (Phillips Curve)
• exchange rate passthrough
• forward x backward looking
• inflation expectation
• Exchange-rate
• exogenous
• endogenous x exogenous
20
Modeling the Pass Through
a4 =constant
a4 = (a41 + a42 D( ptF-1 + et -1 ))
a4 = a41 + a42 et -1
Et2-1 - a42
a4 = a41 2
Et -1 + a42
where:
pF  log of foreign producer price index
e  log of exchange rate
E  exchange rate
21
Treatment of Inflation Expectations
• Forward-looking Phillips curve
• Alternatives
– Institutional approach
 pt*+i
 *
Et ( pt +i ) =  pt +i +1 ,
p* + 2
 t +i
where
pt*+i
is the inflation target for
t +i
22
Treatment of Inflation Expectations
• Alternatives
– Model Consistent (recursive solution)*
{Et ( pt +i )}( 0)
= {initial guess}
Solve the model
Do
{Et ( pt +1 )}( n +1) = {pt +1 }( n) and
solve the model
until {Et ( pt +1 )}
( n +1)
 {pt +1 }( n
+1)
where a  b means that b is in a neighborhood of a.
*The convergence is usually achieved in less than 20 iterations.
23
Exchange Rate Determination
• Exchange rate follows the equation below, based on a UIP:
Et et +1 - et = it - itF - xt
Det = DitF + Dxt - Dit + t
where:
e  log of exchange rate
iF  log of foreign interest rate
x  log of risk premium
  residual including the expectation variations assumed
white noise
24
Exchange Rate Determination
• Modeling the risk premium
– exogenous path
– endogenous determination
• depends on PSBR/GDP ratio (primary) and other risk
premium determinants.
DXt = g1 Xt -1 + g2 DPRt -3 +
N
g
j =3
j
DZ j ,t -t j
where:
X
 risk premium (SOT) in basis points
PR  PSBR/GDP ratio (primary)
Zj  other risk premium determinants
25
Forecasting
• Fan Chart
– Measure of central tendency
• median: the model estimate the mean, median is obtained
using the variance and skewness of a two-piece normal
distribution.
– Shocks stylization
• The magnitudes are obtained from out of model estimation.
The assessment of variance and skewness are subjective.
– Variance
• It is calculated using the historical forecast error as
benchmark. However, it can be adjusted by subjective
assessment.
26
Inflation Forecast
Inflation Fan Chart
Forecasted IPCA - Inflation with interest rate fixed at 19.00% p.y.
(accumulated inflation in 12 months)
2003:4
2003:2
2002:4
2002:2
2001:4
2001:2
2000:4
2000:2
1999:4
1999:2
10
8
6
4
2
0
-2
-4
27
Forecast: IPCA
IPCA with 19.00% p.y. fixed interest rate
Confidence Interval
Central
50%
Projection
30%
Year
Q
10%
2001 4
7.0
7.2
7.3
7.5
7.6
7.7
7.4
2002 1
6.1
6.4
6.6
6.9
7.2
7.5
6.8
2002 2
5.1
5.5
6.0
6.3
6.8
7.2
6.1
2002 3
3.4
4.0
4.6
5.1
5.6
6.3
4.8
2002 4
2.0
2.7
3.3
4.0
4.6
5.4
3.7
2003 1
1.4
2.2
3.0
3.7
4.4
5.2
3.3
2003 2
0.9
1.7
2.5
3.3
4.0
4.9
2.9
2003 3
0.5
1.4
2.2
3.0
3.8
4.7
2.6
2003 4
0.3
1.3
2.1
2.9
3.7
4.7
2.5
Note: Accumulated inflation in 12 month, in % p.y. The values correspond to the ones shown
in inflation fan chart.
28
Inflation Market Expectations
Inflation Market Expectations
median of IPCA for 1999, 2000, 2001, 2002 and 2003
(daily figures: June 24, 1999 to February 22, 2002
10
1999
9
8
2000
6
2002
5
4.85
2001
4
4.00
2003
3
Source: Investor Relations Group / Banco Central
Jan 31
Dec 26
Nov 20
Oct 10
Sep 04
Jul 31
Jun 26
May 18
Apr 11
Mar 07
Jan 29
Dec 21
Nov 16
Oct 09
Sep 01
Jul 28
Jun 23
May 18
Apr 11
Mar 03
Jan 28
Dec 22
Nov 17
Oct 08
Sep 02
Jul 29
2
Jun 24
(%)
7
29
Interest Rate Market Expectations
Over-Selic Rate Market Expectations
Median of Over-Selic Rate for 2001, 2002 and 2003
(daily figures: August 1st, 2001 to February 22, 2002)
20
2001
19
2002
17
17
16
2003
15
14.1
14
13
12
8/1/01
8/8/01
8/15/01
8/22/01
8/29/01
9/5/01
9/13/01
9/20/01
9/27/01
10/4/01
10/11/01
10/19/01
10/26/01
11/6/01
11/13/01
11/21/01
11/28/01
12/5/01
12/12/01
12/19/01
12/27/01
1/4/02
1/11/02
1/18/02
1/25/02
2/1/02
2/8/02
% p.y.
18
Source: Investor Relations Group / Banco Central
30
Exchange Rate Market Expectations
Exchange Rate (R$/US$) Market Expectations
Median of R$/US$ for 2001, 2002 and 2003
(daily figures: August 1st, 2001 to February 22, 2002)
3.10
2.90
2.70
2.7
2002
2.55
2.50
2001
2.30
2.10
Source: Investor Relations Group/Banco Central
2/14/02
2/4/02
1/24/02
1/15/02
1/4/02
12/24/01
12/13/01
12/4/01
11/23/01
11/13/01
10/31/01
10/22/01
10/10/01
10/1/01
9/20/01
9/11/01
8/30/01
8/21/01
8/10/01
1.90
8/1/01
R$/US$
2003
31
GDP Market Expectations
GDP Growth Market Expectations
Median of GDP growth for 2001, 2002 and 2003
(daily figures: August 1st, 2001 to February 22, 2002)
4.5
4.0
2003
3.5
3.0
2.4
2002
2.5
2.0
2001
1.5
1.8
1.0
Source: Investor Relations Group/Banco Central
2/13/02
2/4/02
1/25/02
1/17/02
1/9/02
12/31/01
12/20/01
12/12/01
12/4/01
11/26/01
11/16/01
11/7/01
10/26/01
10/9/01
10/18/01
10/1/01
9/21/01
9/13/01
9/4/01
8/27/01
8/17/01
0.0
8/9/01
0.5
8/1/01
% p.y.
3.5
32
Recent Challenges
Recent Challenges in an Inflation Targeting Regime
– Nominal (and real) exchange rate changes
– Prices administered by contracts
– Quarterly targets within IMF program
– Fiscal dominance?
33
Exchange Rate Changes
– How to deal with large RER adjustments
– Pass through and repressed pass through
– Future exchange rate Bonus
34
Nominal Exchange Rate
Evolution of the Nominal Exchange Rate
3.00
2.80
R$/US$
2.60
2.40
2.39
2.20
2.00
1.80
1.60
1.40
1.20
Jan
99
May
Sep
Jan
00
May
Figures updated up to Feb 26th, 2002
Sep
Jan
01
May
Sep
Jan
02
35
Exchange Rate
Exchange Rate: January 1998 - February 2002
(R$/US$)
2.80
2.3947
2.60
2.40
2.20
2.00
1.80
1.60
1.40
Inflation Targeting
1.20
Jan-02
Sep-01
May-01
Jan-01
Sep-00
May-00
Jan-00
Sep-99
May-99
Jan-99
Sep-98
May-98
Jan-98
1.00
36
Real Exchange Rate
Evolution of the Real Exchange Rate (R$/US$)
at January 2002 wholesale prices
(January 2002=100)
3.00
2.80
2.60
2.42
2.27
Average in the period
2.40
2.20
2.00
1.80
1.60
Jan
Jan
Jan
Jan Jan
Jan
Jan Jan
Jan Jan Jan
Jan
Jan
Jan
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Real Exchange Rate at Jan 2002 prices (WPI)
37
Real Exchange Rate
Evolution of the Real Exchange Rate (R$/US$)
at January 2002 consumer prices
(January 2002=100)
3.00
2.80
2.60
2.42
2.40
2.20
2.00
Average in the period
1.80
1.71
1.60
1.40
1.20
Jan
Jan
Jan
Jan
Jan
Jan
Jan Jan
Jan Jan
Jan
Jan
Jan
Jan
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Real Exchange Rate at Jan 2002 prices (CPI-Fipe)
38
Two Interesting Issues
– Is inflation targeting inconsistent with an IMF
program?
– Inflation targeting and prices administered by
contracts.
39
Inflation and
Prices Administered by Contracts
12-Month
22
20
18
Prices administered by contracts
(%)
16
14
12
10
IPCA
8
6
4
2
Free prices
0
Jan
May
Sep
Jan
May
Sep
Jan
May
Sep
Jan
99
99
99
00
00
00
01
01
01
02
IPCA
Admin.
Livres
40
Transition Table - Fixed Interest
2002 2003
Observations
Copom January
3.83
2.88
p January *
4.01
2.93
Gasoline and Diesel **
3.75
2.68
Gasoline 2002 (-10.2 -> -11.9)
Bottled Gas **
3.75
2.63
2002 (9.0 -> 17.9)
Administered by contracts (Total) ** 3.77
2.95
2002 (5.44 -> 5.72)
2003 (3.47 -> 3.85)
Dollar
4.01
3.06
(2.37 -> 2.42)
E(p)
4.05
3.07
(2002:4.68 => 4.80; 2003:4.0 => 4.0)
Basic Scenario
4.05
3.07
Oil-by products
(constant since Feb 9)
3.82
3.01
(0.40 -> 0.52)
Considers a updating for the
prices administered by contracts in January
Gasoline 2002 (-13.95)
Diesel 2002 (-1.93)
Bottled Gas (14.80)
* Includes the January inflation effect.
** Reflects the effect of the updated projection of the prices only from February to December 2002.
41
IMF Inflation Targets
IMF Inflation Targets
10
9
8
7
6
5
4
3
2
1
IPCA 12-month
Inner band
Sep-02
Jun-02
Mar-02
Dec-01
Sep-01
Jun-01
Mar-01
Dec-00
Sep-00
Jun-00
Mar-00
Dec-99
Sep-99
Jun-99
Mar-99
Jan-99
0
Central target
Outer band
42
IMF Agreement
IMF Agreement - IPCA Targets Interval
8
8
7,8
7,67
7,8
Model Projection
7,3
7,06
7
6,76
6,46
Central Target
IMF
6
Consultation
to the Board
6,2
5,46
5
5,6
Communication
to the
Mission
4,05
4
3
2
1
2001:3
2001:4
2002:1
2002:2
2002:3
2002:4
43
Fiscal Targets - Primary Surplus
Fiscal Targets - IMF
Primary Surplus
43.7
45
40.2
30
Target
15
Sep-02
Jun-02
Mar-02
Dec-01
Sep-01
Jun-01
Mar-01
Dec-00
Sep-00
Jun-00
Mar-00
Dec-99
Sep-99
Jun-99
0
Mar-99
R$ billion
Occurred
Year cumulative data
44
Net Public Sector Debt Dynamics
Up to Dec 2001: occurred
50
36.9
40
30
Forecasted from December 2002
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
20
1991
% of GDP
60
45
A Few Important Questions
– Why has monetary policy been credible in Brazil?
– What is the sustainable growth rate in Brazil?
– What is the current pass through coefficient?
46
GDP Growth (% real variation)
5
4.36
4
3
2.00
2.50
2001 *
2002 *
2
0.81
1
0.13
0
1998
1999
/* 2001 and 2002 projections
2000
47
Potential GDP
GDP and Potencial GDP
In R$ millions of 1999
1,100
1,000
Potencial GDP
900
800
GDP
700
GDP
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
600
Potencial GDP
48
Potential GDP
Total Factor Productivity
Annual and HP Smoothed
1.00
0.98
0.96
0.94
0.92
0.90
0.88
0.86
0.84
Annual
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
0.82
HP
49
Potential GDP
2001-05 Potencial GDP: Scenarios and Forecasts
TFP
INVESTMENT *
Hip. 1
Hip. 2
Hip. 3
0.77%
3.30%
3.55%
3.62%
1.00%
3.60%
3.78%
3.85%
1.20%
3.81%
3.99%
4.06%
1.50%
4.11%
4.30%
4.37%
(*) In 1999 prices
Hip.1 - Investment equals to 19,5% - 20%-20,5%-21%-21,5% in 2001-04, respectively.
Hip.2 - Investment equals to 20%-21%-22%-23% -24% in 2001-04, respectively.
Hip.3 - Investment equals to 20%-21,2%-22,4%-23,6%-2,84% in 2001-04, respectively.
50
0.06
2001:3
2001:2
2001:1
2000:4
2000:3
2000:2
2000:1
1999:4
1999:3
1999:2
1999:1
1998:4
1998:3
1998:2
1998:1
1997:4
1997:3
1997:2
1997:1
Pass Through
Evolution of the Pass Through Coefficient
0.20
0.18
0.16
0.14
0.12
0.10
0.08
51
Pass Through
Pass Through Comparison
Months
Short
Long
G&W
w/for
w/for /2
America
(2)
(4)
3 months
0.123
0.117
0.20
6 months
0.131
0.228
0.53
after 1 year
0.134
0.441
0.69
18 months
0.134
0.642
1.24
52
Assessments
– Credibility is a moving average concept. Fiscal is
important.
– Growth rate in Brazil depends on external financing
restriction and reforms.
– Pass through from exchange rate has been moderate.
Future?
– Two issues: IMF and IT and prices administered by
contracts.
53
Relative Success, Why?
– Strong fiscal performance.
– GDP did not collapse. Long-awaited crisis allowed
private sector hedging.
– Low pass through: output gap, overvaluation, and initial
inflation.
– Credibility of the IT Regime.
54