Brazil’s macroprudential framework to tackle the great financial Crisis: Monetary policy, financial regulation and the banking system

Abstract

This chapter analyzes one feature of Brazil’s economic response to the global financial crisis that started in 2008. The authors propose that the country succeeded in tackling the crisis by adopting a macroprudential approach. Indeed, to achieve this result a macroprudential framework was utilized, based on three pillars: (i) the conducting of monetary policy and an inflation-targeting regime performance; (ii) evolution of financial regulation; and (iii) role of the public banking system. In order to explain Brazil’s reaction, the chapter starts by analyzing the evolution of the monetary policy, beginning with the adoption of the inflation-target regime in 1999, discussing its achievements and its problems. In addition, the regulation of the financial system and also the composition of the banking sector, especially the role of public banks, are analyzed. With these three elements together, it is possible to assess their individual role and importance to the maintenance of financial stability and their interdependence. The authors conclude that the Brazilian financial system is marked by its conservatism. The result is twofold: while it makes the system more resilient to crisis, the excess of caution in macroprudential policy can lead to losses from an output and employment perspective, and limitations to the financing of the economy.