OPTIMAL MONETARY RULES IN A CONTEXT OF FISCAL DISEQUILIBRIUM: EVIDENCE FROM BRAZIL (1996:I - 2007:I)

Abstract

This paper aims to derive an optimal monetary policy rule in a context of fiscal disequilibrium. We analyze the transmission channels of the fiscal and monetary policies through estimation of a Philips curve and the fiscal IS curve. The results indicate that the fiscal deficit is statistically significant and affects the inflation rate indirectly via output gap. Furthermore, the results also suggest a perverse effect of the interest rate on the exchange rate and on inflation. In this context, we found empirical evidence that the Brazilian economy shows a non-Ricardian regime for the period 1996: I to 2007: I.