one year of inflation targeting in brazil marvin goodfriend federal reserve bank of richmond central...
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![Page 1: One Year of Inflation Targeting in Brazil Marvin Goodfriend Federal Reserve Bank of Richmond Central Bank of Brazil Rio de Janeiro July 10-11, 2000](https://reader036.vdocuments.us/reader036/viewer/2022082713/5697bf941a28abf838c8fe63/html5/thumbnails/1.jpg)
One Year of Inflation Targeting in Brazil
Marvin GoodfriendFederal Reserve Bank of Richmond
Central Bank of BrazilRio de Janeiro
July 10-11, 2000
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Key Aspects of Inflation Targeting
• put price stability first
• announce numerical targets
• full information to set instrument
• transparency to support credibility
• accountability to discipline central bank
• challenges for Brazil
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Put Price Stability First
• communicate rationale: experience, theory
• mandate priority for inflation goal
• CB responsible for price stability
• CB independence: financial, instrument
• implicit support from other institutions and policies
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Announce Numerical Targets
• explicit commitment
• burden on CB to explain misses
• anchor expectations
• focus discussion of macroeconomic policies
• foundation for quantitative monetary policy analysis
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Full Information To Set Instrument
• use all information to forecast future inflation pressures and to position interest rate policy
• improve quantitative econometric modeling techniques
• recognize estimation, simulation complications due to short regime history, imperfect credibility
• rely on market sentiment, indicators of inflation expectations
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Transparency to Support Credibility
• use transparency to develop credibility• convey comprehensive assessment of inflation pressures --
relate fiscal, monetary, exchange rate developments• use Inflation Report to present coherent, unified view of short-
run policy situation• provide assessment of data• provide quantitative understanding of policy • speak out if fiscal, exchange rate, trade, banking policies
conflict with inflation target• central bank governor should act as go-between: enhance
communication between markets and policymakers
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Accountability to Discipline Central Bank
• disciplines CB
• reinforces CB responsibility for inflation
• gives CB opportunity to demand that fiscal, trade, credit policies conform to inflation target
• gives CB opportunity to point out costs of policies in conflict with inflation target
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Challenges for Inflation Targeting in Brazil
• CB has responsibility without full authority for price stability
• fiscal policy, exchange rate policy must be made to conform to inflation target
• inflation targeting procedures provide window of opportunity to change institutional behavior
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Challenges for Inflation Targeting in Brazil
• improve understanding of Brazilian laws, institutions, data, and fiscal, trade, banking policies to enhance credibility and reduce Brazil’s premium in capital markets
• fiscal dominance must be overcome for inflation targeting to succeed--provide a quantitative frame-work in the Inflation Report for understanding the relationship between fiscal policy, inflation targeting, interest rate policy, and economic growth
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Challenges for Inflation Targeting in Brazil
• transparency, credibility of inflation target enhanced by outspoken, independent CB governor openly critical of economic policies that jeopardize inflation target
• Market concern that exchange rate policy could conflict with price stability could hurt credibility for the inflation target. What is policy behind CB acquisition and sales of foreign reserves?
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Challenges for Inflation Targeting in Brazil
• create understanding of reasons for adjustment of flexible exchange rate (terms of trade shock, foreign growth, change of interest differential)
• bring down high bank reserve requirements and maintain strong supervision and regulation of banks
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Challenges for Inflation Targeting in Brazil
• lengthen the maturity of the public debt
• explain principles behind managed price policy
• although widely used around the world, inflation targeting framework not yet tested by generally rising inflation