Macroeconomic policies in Brazil before and after the 2008 global financial crisis: Brazilian policy-makers still trapped in the New Macroeconomic Consensus guidelines

Abstract

Even though the New Macroeconomic Consensus (NMC) guidelines have been under review by mainstream economists from developed countries since the 2008 global financial crisis, Brazilian policy-makers are still following these old recommendations. The NMC was adapted in Brazil in 1999 as a policy arrangement known as the macroeconomic tripod: A combination of inflation targeting, floating exchange rates and targets for the primary fiscal surplus. The theoretical basis of this policy arrangement is thus closely aligned to that of the NMC: A reduced (if any) role for fiscal policy and an exclusive focus on price stability for monetary policy. Particularly with respect to the experience of inflation targeting in Brazil, by implementing a vector autoregression model for the period 2000-17, we show that (i) inflation dynamics are mostly cost-push rather than demand-pull; (ii) inflation rates show low sensitivity to changes in interest rates; and (iii) the main variables negatively affected by an increase in the Brazilian policy rate are the nominal exchange rate (i.e. the Brazilian real tends to appreciate) and output growth. It follows that the macroeconomic tripod is unsuitable to the Brazilian economy, especially considering that, as it is also shown in this article, such arrangement has contributed to perpetuating trends of high real interest rates, domestic currency overvaluation and low economic growth in Brazil in the last two decades. The article ends calling for a new macroeconomic arrangement to reverse these adverse long-term trends.