Transcript Inflation targeting - Banco Central Do Brasil

Banco Central do Brasil
The Managed Floaters: Float or Sink?
Float!
The Case of Brazil
Ilan Goldfajn
April 2001
1
• How the Inflation Targeting Regime has
Operated in the Last Two Years.
• The Effect of the External Shock in 2001
and Pass-through
• Sensitivity to Interest Rates and the Effect
of Depreciation
2
Inflation Targeting
Inflation Rate - IPCA (% over year ago)
Inflation Targeting
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct Jan Mar
97
98
99
00
01
Dotted lines represent the inflation targets for 1999, 2000 and 2001
3
Inflation Expectations
Market Inflation Expectations
median of IPCA for 1999, 2000, 2001 and 2002
(daily figures: June 24, 1999 to April 20, 2001)
10.00
1999
9.00
8.00
2000
6.00
5.00
2001
4.00
2002
3.00
Source: Investor Relations Group / Banco Central
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
2.00
Jul 24
(%)
7.00
4
Economic Activity
GDP (% real variation)
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
4.46
4.30
2000
2001*
0.79
0.22
1998
1999
/* 2001 estimates
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Interest Rate
Over-Selic Rate
(daily figures: January 4, 1999 to April 20, 2001)
50
44.99%
% p.y.
40
30
20
16.30%
10
Jan
99
Apr
Jul
Oct
Jan
00
Apr
Jul
Oct
Jan
Apr
01
7
Fiscal Targets - Primary Surplus
40
Occurred
35
R$
billion
30
25
20
15
Target
10
5
0
Mar
99
Jun
Sep
Dec
Mar
00
Jun
Sep
Dec
Mar
01
Year cumulative data
8
Net Public Sector Debt
Average Maturity * - Public Debt
32.2
31.6
29.8 29.9
29.3
29.0 28.9 29.0
31.4
29.0
29.3
27.3
27.0
26.5 26.6
Jan
00
In months
Mar
May
Jul
Sep
Nov
Jan
01
Mar
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External Shock and the Reaction
• Important External Shocks: U.S. Slowdown
(recession?) and Contagion
• There is no fear of floating
• In principle exchange rate is the only buffer.
However, there is a pass-through from
depreciation to inflation. Fear of Inflation.
• Pass-through is endogenous depends on
output, RER, credibility, policies and etc.
10
FDI: U.S. Slowdown. Size of Decline?
Net Foreign Direct Investment - Equity Capital
Accumulated in the year
35
30.0
25.4
US$ billion
30
8.8
25
16.8
20
15
9.9
10
2.6
5
7.2
30.3
7.1
6.1
24.0
4.0
5.2
19.4
21.1
23.2
1998
1999
2000
20.0
11.6
0
1996
1997
FDI excluding Privatizations
Source: Central Bank of Brazil
2001 *
FDI in Privatizations
* 2001 year projections
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Econometric Exercise
Domestic Interest Rate Responsiveness to US Interest Rate
in Countries without Capital Controls
US int. rate
BP
US int. rate x
BP
0,45
(0.13)**
0,00
(0.00)
-0,01
(0.01)
1,07
(0.20)**
0,20
40
481
Intermediate regimes
0,05
(0.19)
0,00
(0.00)**
-0,05
(0.02)**
1,17
(0.38)**
0,21
40
260
Free-floating regimes
0,91
(0.18)**
-0.00
(0.00)
0,00
(0.01)
0,59
(0.30)**
0,37
40
193
Whole sample
Inflation R-squared Number of Number of
differential
countries observations
Notes:
1. All the regressions contain country fixed effects which are not reported to save space.
2. White heteroskedasticity-consistent stardard errors are in parenthesis.
3. ** and * mean that the estimate is statistically different from 0 at the 5% and 10% significant level
respectively.
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No Fear of Floating. Contagion?
Dollar/Euro e Real/Dollar Behavior
Average Rate % Deviation
20
16.4
15
11.7
10
5
0
-4.0
-5
-3.4
-10
(Observed average Jan/00 to Apr/01 = Real/Dollar 1,88 and Dollar/Euro 0,92)
-15
3
24
Jan/00
14
8
29
Feb Mar/00
19
12
2
26
Apr MayJun/00
17
7
28
JulAug/00
Dollar/Euro
19
10
1
24
15
9
30
20
15
5
Sep Oct Nov/00 Dec/00 Jan/01 Feb Mar Apr/01
Real/Dollar
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Fear of Inflation and Pass-through
Pass-Through Comparison
Months
Short Sample
Long Sample
Paper G&W
Regression
regression
America
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
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Passthrough Coefficient
Evolution of the Passthrough Coefficient
0.20
0.18
0.16
0.14
0.12
0.10
0.08
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
0.06
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The Policy Reaction and the Effect
• Economy was growing fast. Good timing
for the required fiscal and monetary
tightening.
• Monetary policy may be more effective than
in previous regime. Signs on term structure
and credit growth are encouraging. Signs of
sales slowdown.
• There is sensitivity to the exchange rate. Is
the elasticity large enough? Would
depreciation be contractionary this time?
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GDP Growth: No pro-cyclical policy
GDP and Industrial Production
Real variation cumulative in 12 months
8
6
4
2
0
-2
-4
-6
1996
I
III
1997
I
III
1998
I
GDP at market prices
III
1999
I
III
2000
I
III
Industrial production
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Economic Activity
Month Percentage variation
Perspective
Month1/
Year
12-month
-0.75
-0.89
-5.25
-3.59
7.57
10.42
31.80
9.05
10.44
8.50
...
6.15
1. Commerce
- Billing (São Paulo)
- SPC and Telecheque
- SPC
- Consumer confidence index
March
March
March
March
2. Industry
- Production
- Sales
- Employment
- Installed capacity utilization (CNI)
February
February
February
February
0.78
2.75
0.55
0.05
6.53
11.61
2.41
1.09
5.95
10.68
1.43
2.28
3. Labor market
- Unemployment rate
- Real income
February
January
-4.46
-1.16
-24.80
-1.02
-25.03
-0.22
Slowdown
Slowdown
Slowdown
Down
Source: Fcesp, ACSP, IBGE and CNI
1/ Seasonally adjusted series.
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Trade Balance
Trade Balance - monthly and cumulative in 12 months
(US$ billion)
0.6
1.0
0.4
0
0.2
-1.0
0
-2.0
-0.2
-3.0
-0.4
-4.0
- 0.6
-5.0
- 0.8
-6.0
-1.0
-7.0
-1.2
-8.0
-1.4
-9.0
-1.6
-10.0
Mar
01
Jan
98
May
Sep
Jan
99
Monthly - left scale
May
Sep
Jan
00
May
Sep
Cumulative in 12 months - right scale
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Fiscal Results
Sensibility analysis
% of GDP
Itemization
Basic scenario Exchange rate (1 pp aa) Selic (1 pp aa) GDP (1 pp aa)
Net Debt
Nominal - 12-month
50.25
50.46
50.51
49.78
3.39
3.50
3.65
3.36
% of GDP
Itemization
Exchange rate (1 pp aa) Selic (1 pp aa) GDP (1 pp aa)
Net Debt - 12-month variation
0.21
0.26
0.46
Nominal - 12-month variation
0.10
0.26
0.03
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The Fiscal Adjustment Program
Fiscal Targets for 1999-2001
% of GDP
PRIMARY SURPLUS
1999
2000
2001
2002 *
3.10%
3.25%
3.00%
2.70%
3.00%
/* Preliminary
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Conclusions
– No Fear of Floating but Fear of Inflation. Pass-
through from exchange rate has been moderate.
Future?
– Contractionary Monetary and Fiscal Policy are being
implemented in a booming economy.
– Instruments seem to be operating. Exchange rate
buffers most of the shock but interest rate increase
should guarantee inflation on target. Fiscal policy
must maintain debt stability.
– “Sudden stop” is very tough for any regime.
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