Macro II, Tópico 1: Política Monetária e Fiscal: Inflation Targeting em Mercados Emergentes (14 de agosto de 2007, 16h) Prof. Márcio Garcia

Política Monetária e Fiscal: Inflation Targeting em Mercados Emergentes Leituras obrigatórias: Fraga, A. et al, “Inflation Targeting in Emerging Market Economies”, in NBER Macroeconomics Annual 2003. Mishkin, F., “Can Inflation Targeting Work in Emerging Market Countries?”, NBER WP # 10646. FMI, World Economic Outlook, setembro de 2005. Capítulo IV. Disponível em www.imf.org. FMI, “Inflation Targeting and the IMF”, 16/03/2006. Disponível em www.imf.org.

What is inflation targeting? Inflation targeting (IT) has no unanimous definition. Mishkin [2004] formally defines IT as comprising five components: the public announcement of medium-term numerical targets for inflation; an institutional commitment to price stability as the primary goal of monetary policy, to which other goals are subordinated; an information inclusive strategy in which many variables, and not just monetary aggregates or the exchange rate, are used for deciding the setting of policy instruments; increased transparency of the monetary policy strategy through communication with the public and the markets about the plans, objectives, and decisions of the monetary authorities; and increased accountability of the central bank for attaining its inflation objectives.

What is different about IT? According to the World Economic Outlook report (IMF [2005]), the key distinctions between IT other regimes are the following two. The central bank is mandated, and commits to, a unique numerical target in the form of a level or a range for annual inflation. A single target for inflation emphasizes the fact that price stabilization is the primary focus of the strategy and the numeric specification provides a guide to what the authorities intend as price stability. The inflation forecast over some horizon is the de facto intermediate target of policy. For this reason inflation targeting is sometimes referred to as “inflation forecast targeting” (Svensson, 1998). Since inflation is partially predetermined in the short term because of existing price and wage contracts and/or indexation to past inflation, monetary policy can only influence expected future inflation. By altering monetary conditions in response to new information, central banks influence expected inflation and bring it in line over time with the inflation target, which eventually leads actual inflation to the target.

IT and other Monetary Policy Strategies A synthesis of these two definitions of IT may be found in John Taylor´s remark that the main difference between IT and other monetary policy regimes, e.g. money or exchange rate targeting, was that IT used all the information contained in the macro variables to set the basic interest rate, while other regimes used only part of the information available to determine the interest rate. In a seminal paper (Taylor [1999]), where he analyzed the monetary policy rules implied by the different US monetary policy regimes since 1880, he showed the properties that good monetary policy rules in the US must have, e.g., to respond … to inflation and real output more aggressively than during the 1960s and 1970s or than during the international gold standard—and more like the late 1980s and 1990s. That seems to be the key to successful monetary policy strategies, use of all information to appropriately set interest rates to guide inflation expectations. IT is a way to achieve this.

What are the alternatives to IT? Monetary targeting: Instability of money demand; Money multiplier and money velocity vary a lot. Good for countries where the CB has little credibility and analytical capabilities (money targeting is very easy to implement and money data are readily available).

What are the alternatives to IT? Exchange rate targeting: Two types: Fixed exchange rates (currency board, monetary union, and unilateral dollarization); Fixed-but-adjustable-exchange rates (crawling pegs, crawling bands, etc.) Drawbacks: Monetary policy is “imported” from a foreign country whose business cycle may differ; Possibility of speculative attacks; Domestic prices bear all the burden of real exchange rate adjustment.

Why is IT more and more popular? Because apart from it (or IT) there is only the Nike™ approach…

How widely used is IT? In 2005, there were 21 countries that adopted IT as their monetary policy strategy: eight industrial countries and 13 emerging markets (EMs) (IMF [2005]). Table 4.1 of IMF [2005] lists the inflation targeters, as well as other relevant information on how IT is implemented in those countries.

Table 4.1 INFLATION TARGETERS – source: World Economic Outlook, ch4, IMF [2005]

Why is IT more difficult in EM? (Mishkin [2004], Fraga, Golfajn and Minella [2003]). EMs generally have weak fiscal institutions, which leads to fiscal dominance, i.e., the lack of the ability to freely raise the interest rate because of the negative fiscal impact. EMs generally have weak financial institutions, which leads to financial dominance, i.e., the lack of the ability to freely raise the interest rate because of the fear of general bankruptcy of financial institutions. This also includes poor prudential regulation and supervision. EMs’ monetary institutions lack credibility, which may require too high an interest rate to achieve the inflation target, with negative impacts on output growth. Many EMs suffer from currency substitution and liability dollarization, which may seriously hamper the ability to let the exchange rate float. Fear of floating (Calvo and Reinhart [2002]) may arise. EMs are very vulnerable to the reversal of capital flows. Large external shocks cause large damages to the EMs, a phenomenon know as sudden stop (Calvo and Reinhart [2000], Calvo, Izquierdo and Mejia [2004]). This is termed by Fraga, Goldfajn and Minella [2003] external dominance.

Is IT suitable for EM? Even though some of all the factors above may be true for a given EM, the appraisal of the experience of the EMs that have opted for IT seem to run favorably to IT. Let’s see the empirical evidence…

IT performance in EM

IT performance in EM

IT performance in EM

IT performance in EM

IT performance in EM

IT performance in EM

IT performance in EM

Is IT suitable for EM? Although the time since the adoption of IT by EMs is short, the IMF report was able to draw a few conclusions regarding the comparative performance of IT and non-IT EMs. … Inflation targeting appears to have been associated with lower inflation, lower inflation expectations, and lower inflation volatility relative to countries that have not adopted it. There have been no visible adverse effects on output, and performance along other dimensions—such as the volatility of interest rates, exchange rates, and international reserves—has also been favorable (IMF [2005]).

A performance de IT no Brasil

O modelo básico de IT do BCB O ponto de partida do modelo macroeconômico utilizado pelo BCB para a condução da política monetária no regime de metas de inflação, doravante denominado modelo estrutural, é o trabalho de Bogdanski, Tombini e Werlang (2000)[1]. Trata-se de um modelo com quatro variáveis básicas: a taxa de juros, a taxa de inflação, o hiato do produto e a taxa de câmbio. [1] Bogdanski, J., A. Tombini e S. Werlang (2000) “Implementing Inflation Targeting in Brazil”, BCB Working Paper Series nº 1.

O modelo básico de IT do BCB: A curva IS O lado da demanda agregada é descrito por uma Curva IS, que relaciona o hiato do produto à taxa de juros real (medida pela taxa do swap DI-pré de 180 dias negociado na BM&F), a uma medida do grau de confiança do consumidor e a valores defasados do hiato. Para medir o hiato do produto é necessário estimar o produto potencial da economia, variável esta que é não observável.

O modelo básico de IT do BCB: A curva de Phillips O lado da oferta é descrito por uma Curva de Phillips que relaciona a variação dos preços livres (excluindo os itens “Aluguéis” e “Cursos” do IPCA) a suas variações passadas, ao hiato do produto e à variação do custo em reais dos bens importados. Esta última componente incorpora os efeitos da variação da taxa de câmbio R$/US$ sobre a inflação (pass-through). Os preços livres são aqueles determinados livremente pelo mercado, e contrastam com os chamados preços administrados por contrato ou monitorados, cuja determinação reflete algum tipo de participação do Governo.

O modelo básico de IT do BCB: A taxa de câmbio De acordo com o BCB, a taxa de câmbio é determinada por uma equação de paridade descoberta da taxa de juros (UIP), ou seja, ela reflete as variações ocorridas nas taxas de juros doméstica e internacional, no prêmio de risco e choques nas expectativas em relação ao seu comportamento futuro. O ajuste econométrico da UIP aos dados é notoriamente ruim.

O modelo básico de IT do BCB: A função de reação do BC Como o BC é o formulador da função de reação, ele não divulga uma. O que faz é divulgar as distribuições de probabilidades para inflação e crescimento de determinadas trajetórias das taxas de juros.

O modelo básico de IT do BCB: Previsões de Inflação

O modelo básico de IT do BCB: Previsões de Inflação Fonte: Banco Central do Brasil

O modelo básico de IT do BCB: Previsões de Inflação Fonte: Banco Central do Brasil

O modelo básico de IT do BCB: Previsões de Inflação Fonte: Banco Central do Brasil

O modelo básico de IT do BCB: Previsões de Inflação Fonte: Banco Central do Brasil

O modelo básico de IT do BCB: Previsão de Crescimento do PIB Fonte: Banco Central do Brasil

O modelo básico de IT do BCB: Aderência Fonte: Banco Central do Brasil

CREDIBILIDADE IPCA: Meta 12 meses à frente

CREDIBILIDADE IPCA: Meta e Expectativa 12 meses à frente

CREDIBILIDADE IPCA: Meta e Expectativa 12 meses à frente

CREDIBILIDADE Meta, Expectativa e Selic

CREDIBILIDADE Surpresa Inflacionária [IPCAmês t-Emês t-1(IPCAmês t)] vs. Desvio Projetado da Meta de Inflação

CREDIBILIDADE Surpresa Inflacionária e Desvio Projetado da Meta de Inflação

CREDIBILIDADE Desvios Projetados da Meta no Brasil Onde, Surpresa t (dia 15 do mês t)= IPCA mês t-1 (divulgado dia 15 do mês t) – Expectativa IPCA do mês t-1 (no dia 15 do mês t-1) Robusto a variações da janela de estimação: coef da surpresa positivo e significativo com dados a partir de jan/2003, porém menor.

O Efeito da surpresa inflacionária de curto prazo nas expectativas de médio prazo: uma comparação internacional

IGPM Mercado = (1+Pré)/(1+Cupom IGPM) -1

IGPM Mercado = (1+Pré)/(1+Cupom IGPM) -1

IGPM Mercado vs. IGPM esperado FOCUS

Prêmio de Risco IGPM = IGPM “mercado” – E(IGPM) focus

Surpresa IGPM [IGPMmês t-Emês t-1(IGPMmês t)] vs. Medidas de Exp IGPM

Surpresa IGPM vs. Prêmio de Risco IGPM (quanto maior a incerteza, maior o prêmio de risco)

O efeito da surpresa IGPM nas diversas medidas de expectativa

CREDIBILIDADE Falta de credibilidade da autoridade monetária. Surpresas de curto prazo da inflação no Brasil (IPCA e IGPM) levam a uma grande correção nas expectativas de médio prazo, mesmo controlando para choques do câmbio. Este efeito não foi encontrado nos outros países analisados. Duas principais razões (e/ou): Falta de credibilidade da autoridade monetária. Excessiva indexação da economia. O fato de o prêmio de risco inflacionário ser extremamente correlacionado com a medida de surpresa inflacionária implica que, pelo menos em parte, o problema se deve à falta de credibilidade da autoridade monetária.

Can IT deliver sustained growth in Brazil? The five problematic points for IT in EM were: Fiscal dominance; Financial dominance; Low credibility; Liability dollarization and currency substitution; External dominance. Brazil suffers from 1, although the CB has behaved as if it did not. How long may this behavior continue without compromising debt sustainability? 3 used to be a problem, but it is solved as long as the “right” people are at the helm of the CB (CB independence would greatly help). 5 is not currently a problem given the massive, quickly and costly dedollarization undertaken. 2 and 4 were never a problem for Brazil.

Can IT deliver sustained growth in Brazil? Given the strong performance of the export sector, external dominance seem to be a much smaller risk in the medium run. By fiercily pursuing the inflation target, the BCB has achieved as much credibility as possible in the current institutional arrangement. Granting instrument (not goal) independence to the BCB would be a free lunch. Fiscal sustainability in the medium and long runs, despite the current high primary surplus, remain the largest risk.

Can IT deliver sustained growth in Brazil? If nothing is done, large budget deficits will arise in the future, mainly because of social security provisions and demographics. Brazil has a tax burden of 38% of GDP, by far the largest in LA. The large (and poorly conceived) taxes harm production and investment, thereby affecting growth. At the same time, government expenditures (which are not affected by monetary policy) act as an impediment to monetary contractions, requiring higher real interest rates to affect aggregate demand.

Lessons for other Emerging Markets IT can work in EM despite their fragilities; The IT framework makes monetary policy more transparent and, therefore, credible; IT acts as better tool to align inflation expectations; IT helps to achieve better economic policy in general, by making clear who the true culprits of low growth and unemployment are. In that sense, it helps to build the institutional framework conducive to sustained growth, as the fiscal responsibilty law. IT must include escape clauses in face of large external shocks, as the Brazilian provision to deal with administered prices shocks and exchange rate shocks.