Maria Eduarda Pequito Tanus Amari

This study analyzes the inflation targeting regime in Brazil from 2002 to 2014, explaining the interest rate fluctuations made by the Monetary Policy Committee, by incorporating new variables to the reaction function. Therefore, two reaction functions to the Brazilian Central Bank were estimated using the Autoregressive Vectors (VAR) and Autoregressive Structural Vectors (SVAR) methodologies for short and long-term relationships, respectively, among the variables. The reaction function includes the variable of deviation of effective inflation from its long-term average rather than the goal, as a better measure to capture inflation dispersion. Moreover, market expectations were included in the reaction function, through the Bovespa index, and net public sector debt as a proportion of GDP. Inflation expectations are also part of the empirical model to provide forward-looking content to the rule, along with real effective exchange rate, as a representative of international shocks, and the lagged values of the Selic, to capture inertial effects of this rate. Shocks over economic activity were represented by GDP variation and the deviation of the unemployment rate to its long-term trend, in two different models. The main results are: the presence of strong inertial component of the Selic rate; the significance of inflation expectations and the Bovespa index, representing the forward-looking behavior of the Central Bank, which is consistent with the New Macroeconomic Consensus ideas; importance of effective inflation deviation relative to its long-term average, suggesting that the Central Bank reacts to its movements in decision making, in addition, this effect occurred in the sixth month highlighting the lag of monetary policy Brazil (or calendar effect); significance of GDP variation and the deviation of unemployment, which indicate that the Central Bank watches movements in economic activity, and significance of public debt relative to GDP, suggesting that this institution also note the movements of fiscal policy. Expectations and the deviation of inflation, which are measures of dispersion, must be well anchored to the inflation target, so, the credibility of the system is important. In the event of a relaxation of the system, expectations may change, because they are not static, but reviewed by agents during the period. Therefore, the Central Bank should work in an attempt to drive inflation to the target and not be satisfied to keep it within the upper limit.