Macro II, Tpico 1: Poltica Monetria e Fiscal: Inflation Targeting em Mercados Emergentes 14 de agost

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

• Prof. Márcio Garcia

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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.

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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.

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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.

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IT and other Monetary Policy Strategies

• A synthesis of these two definitions of IT may be
  found in John Taylors 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 standardand
  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.

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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).

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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.

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Why is IT more and more popular?

• Because apart from it (or IT) there is only the
  Nike approach

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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.

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Table 4.1 INFLATION TARGETERS source World
Economic Outlook, ch4, IMF 2005
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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.

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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.
• Lets see the empirical evidence

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IT performance in EM
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IT performance in EM
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IT performance in EM
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IT performance in EM
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IT performance in EM
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IT performance in EM
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IT performance in EM
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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 dimensionssuch as the
  volatility of interest rates, exchange rates, and
  international reserveshas also been favorable
  (IMF 2005).

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A performance de IT no Brasil
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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.

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O modelo básico de IT do BCBA 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 BMF), 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.

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O modelo básico de IT do BCBA 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.

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O modelo básico de IT do BCBA 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.

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O modelo básico de IT do BCBA 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.

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O modelo básico de IT do BCBPrevisões de
Inflação
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O modelo básico de IT do BCBPrevisões de
Inflação
Fonte Banco Central do Brasil
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O modelo básico de IT do BCBPrevisões de
Inflação
Fonte Banco Central do Brasil
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O modelo básico de IT do BCBPrevisões de
Inflação
Fonte Banco Central do Brasil
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O modelo básico de IT do BCBPrevisões de
Inflação
Fonte Banco Central do Brasil
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O modelo básico de IT do BCBPrevisão de
Crescimento do PIB
Fonte Banco Central do Brasil
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O modelo básico de IT do BCBAderência
Fonte Banco Central do Brasil
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CREDIBILIDADEIPCA Meta 12 meses à frente
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CREDIBILIDADEIPCA Meta e Expectativa 12 meses à
frente
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CREDIBILIDADEIPCA Meta e Expectativa 12 meses à
frente
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CREDIBILIDADEMeta, Expectativa e Selic
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CREDIBILIDADESurpresa Inflacionária IPCAmês
t-Emês t-1(IPCAmês t) vs. Desvio Projetado da
Meta de Inflação
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CREDIBILIDADESurpresa Inflacionária e Desvio
Projetado da Meta de Inflação
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CREDIBILIDADEDesvios 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.
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O Efeito da surpresa inflacionária de curto prazo
nas expectativas de médio prazo uma comparação
internacional
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IGPM Mercado (1Pré)/(1Cupom IGPM) -1
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IGPM Mercado (1Pré)/(1Cupom IGPM) -1
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IGPM Mercado vs. IGPM esperado FOCUS
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Prêmio de Risco IGPM IGPM mercado E(IGPM)
focus
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Surpresa IGPM IGPMmês t-Emês t-1(IGPMmês t) vs.
Medidas de Exp IGPM
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Surpresa IGPM vs. Prêmio de Risco IGPM(quanto
maior a incerteza, maior o prêmio de risco)
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O efeito da surpresa IGPM nas diversas medidas de
expectativa
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CREDIBILIDADE

• 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.

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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.

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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.

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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.

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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.