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Time-varying monetary policy reaction function under asymmetric preferences: revisiting the Brazilian inflation targeting experience

Diego Ferreira (Department of Economics, Federal University of Paraná, Curitiba, Brazil)
Andreza Aparecida Palma (Department of Economics, Federal University of São Carlos, Sorocaba, Brazil)
Marcos Minoru Hasegawa (Department of Economics, Federal University of Paraná, Curitiba, Brazil)

Journal of Economic Studies

ISSN: 0144-3585

Article publication date: 24 September 2020

Issue publication date: 27 April 2021




This paper analyzes the potential presence of time-varying asymmetries in the preference parameters of the Central Bank of Brazil during the inflation targeting regime.


Given the econometric issues inherent to classical time-varying parameter (TVP) regressions, a Bayesian estimation procedure is implemented in order to provide more robust parameter estimates. A stochastic volatility specification is also included to take into account the potential presence of conditional heteroskedasticity.


The obtained results show that the reduced form and structural parameters were not constant during the period considered. Moreover, the subsequent analysis of the preference parameters provided evidences of short periods in which asymmetry was an important feature to the conduction of monetary policy in Brazil. Yet, during most of the sample period, the loss function was considered to be symmetrical.


This paper aims to contribute to the rather scarce monetary debate on time-varying central bank preferences. The study of Lopes and Aragón (2014) is, to the best of the authors’ knowledge, the only study for Brazil considering specifically TVPs. The authors applied Kalman filter estimation to data from 2000:M1 to 2011:M12. Despite the similar structure of TVPs, the present paper extends the latter study by controlling for stochastic volatility. Ignoring conditional heteroskedasticity might lead to spurious movements in time-varying variables and inaccurate inference (Hamilton, 2010). Thus, the stochastic volatility specification is included to take this issue into account. The authors follow the theoretical scheme put forward by Surico (2007) and Aragón and Portugal (2010), in which the economy is modeled from a New Keynesian perspective and the central bank loss function is assumed to be asymmetric regarding the responses to inflation and output deviations from their targets. On the empirical side, the authors propose a TVP univariate regression with stochastic volatility for the Brazilian reduced-form reaction function, following closely the Bayesian econometric procedure developed by Nakajima (2011). Given the nonlinear non-Gaussian nature of the TVP regression with stochastic volatility, the choice of a nonlinear Bayesian approach using the Markov chain Monte Carlo (MCMC) method is justified due to the intractability of the associated likelihood function (Primiceri, 2005). Finally, based on the theoretical model specification, the authors intend to recover the central bank preference parameters as to further evaluate the degree of asymmetry and its potential time-variation under the inflation targeting regime.



This study was financed in part by the “Coordenação de Aperfeiçoamento de Pessoal de Nível Superior ‐ Brasil (CAPES)” – Finance Code 001 (Diego Ferreira). Andreza Palma thanks financial support from the National Council for Scientific and Technological Development ‐ CNPq, Brazil


Ferreira, D., Palma, A.A. and Hasegawa, M.M. (2021), "Time-varying monetary policy reaction function under asymmetric preferences: revisiting the Brazilian inflation targeting experience", Journal of Economic Studies, Vol. 48 No. 4, pp. 893-911.



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