Fear of Floating: Welfare Costs of Monetary Responses in Brazil

Fear of Floating: Welfare Costs of Monetary Responses in Brazil

• Autor
• PEDRO IVO CAMACHO ALVES SALVADOR
• Resumo

• This paper calibrates a New Keynesian DSGE model using Brazilian quarterly data (1999Q3–2024Q4) to evaluate the welfare implications of monetary policy responses to exchange rate shocks. Brazil's economy exhibits hyper-financialization, generating hypersensitivity of interest rates to fiscal dynamics and exchange rate fluctuations. We contrast a 'Historical Vulnerability' scenario (high pass-through) against a 'Modern Regime' (low pass-through), and estimate a VAR model to assess impulse responses of the Selic rate to inflation, unemployment, output gap, and exchange rate shocks. Results indicate that while aggressive monetary responses were historically welfare-improving, maintaining such hypersensitivity in the current environment generates deadweight loss. A hybrid Taylor rule incorporating moderate exchange rate smoothing reduces GDP contraction by up to 40% without compromising inflation stability. Adjusting the central bank's reaction function to modern structural realities could reduce social welfare losses by approximately 92.4%.

• Palavras-chave
• DSGE, exchange rate pass-through, monetary policy, Taylor rule, Brazil
• Modalidade
• Comunicação oral
• Área Temática
• Macrofinanças

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