Optimal rules for monetary policy in Brazil

Abstract

This paper presents optimal rules for monetary policy in Brazil derived from a backward looking expectation model consisting of a Keynesian IS function and an Augmented Phillips Curve (ISAS). The IS function displays'a high sensitivity of aggregate demand to the real interest rate and the Phillips Curve is accelerationist. The optimal monetary rules show low interest rate volatility with reaction coefficients lower than the ones suggested by Taylor (1993a,b). Reaction functions estimated through ADL and SUR models suggest that monetary policy has not been optimal and has aimed to product rather than inflation stabilization.