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

The recent Brazilian disinflation process and costs Alexandre A. Tombini Background paper: Tombini and Alves (2006). April 2006. Summary of Presentation . 2002 inflation shock; disinflation process 2003-2006; changes in the underlying inflation process; cost of disinflation. 12.5. 9.3.

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The recent Brazilian disinflation process and costs Alexandre A. Tombini Background paper: Tombini and 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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