The cyclical power of monetary policy in Brazil evidence from state dependent local projections
DOI:
https://doi.org/10.1590/1980-53575639imfKeywords:
Monetary policy effectiveness, Economic cycles, Local projectionsAbstract
The sensitivity of inflation and output to interest rate movements may vary over the business cycle, raising the question of whether monetary policy is more effective during recessions. This article examines whether the effects of monetary policy differ between expansionary and recessionary phases of the Brazilian economy. To this end, we estimate impulse response functions conditional on the states of the Brazilian Gross Domestic Product (GDP) cycle from 1999 to 2023, using the Smooth Transition Local Projections (STLP) method. The results show that monetary policy is more powerful during recessions, both in controlling inflation and in contracting output. Additionally, industrial domestic absorption responds more strongly to increases in the interest rate in these periods, particularly in the consumption of capital goods and durable goods, which exhibit greater sensitivity to monetary policy than nondurable goods.
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