Estimating monetary policy reaction functions for emerging market economies: The case of Brazil

The paper investigates monetary policy in Brazil following a shift to a floating exchange rate alongside inflation targeting adoption. The benchmark reaction function reveals that the Central Bank behaves according to the Taylor principle by raising the overnight Selic policy interest rate more than the amount by which expected inflation exceeds the target. The investigation also considers a data-rich environment via an excess policy response containing information from a panel of 45 economic time series. The excess policy response carries a positive and significant coefficient in the reaction function including only an inflation gap variable.

Research highlights► The paper investigates monetary policy in Brazil after inflation targeting adoption. ► The strategy involves running regressions based on Taylor-type reaction functions. ► Ancillary equations model a data-rich environment via an excess policy response -EPR. ► The analysis shows that the Central Bank behaves according to the Taylor principle. ► The EPR matters in the reaction function including only an inflation gap variable.