Conservatism and rigidity in monetary policy

Vol. 31 No. 3 (2011)

Jul-Sep / 2011
Published July 1, 2011
PDF-Portuguese (Português (Brasil))
PDF-Portuguese (Português (Brasil))

How to Cite

Modenesi, André de Melo. 2011. “Conservatism and Rigidity in Monetary Policy: An Estimate of the BCB’s Reaction Function (2000-2007)”. Brazilian Journal of Political Economy 31 (3):415-34.

Conservatism and rigidity in monetary policy

an estimate of the BCB's reaction function (2000-2007)

André de Melo Modenesi
Professor do Instituto de Economia da Universidade Federal do Rio de Janeiro (IE/UFRJ) e Pesquisador do CNPq.
Brazilian Journal of Political Economy, Vol. 31 No. 3 (2011), Jul-Sep / 2011, Pages 415-434


This paper aims at evaluating the conduction of monetary policy after the adoption of inflation targeting. Formation of Selic rate is modeled by estimating a reaction function of the BCB. Results show an excessive degree of interest rate smoothing and a high level of equilibrium interest rate. This evidence supports the belief that Selic rate’s formation is ruled by a conservative behavior. The conservative conduction of monetary policy is related to two distinct features of BCB’s reaction function: i) the great weight of autoregressive components; and, chiefly, ii) a very high level of the equilibrium interest rate. The main conclusion is that, all remaining unchanged, the interest rate would hardly be reduced in a satisfactory way. Massive and chronic deflation would be needed if Selic were to reach a reasonable level, closer to that of rates in the rest of the world. This evidences the need for a debate on the adequacy of current stabilization strategy.

JEL Classification: E43; E58.

Keywords: Taylor rule Selic conservatism