Flattening of the Phillips curve in Brazil after inflation targeting: evidence from a multi-region model with time-varying parameters
DOI:
https://doi.org/10.1590/1980-53575632gfmpKeywords:
Phillips curve, Anchoring of expectations, Inflation targetsAbstract
The literature has credited the weaker relationship between inflation and unemployment in the last three decades to two factors: (i) better anchoring of long-term expectations after the adoption of inflation targets; and (ii) loss of market power of firms and workers as a result of a structural change, as trade liberalization, promoted in the same period. The present work extends the multi-region model proposed by Hazell et al. (2020) and includes time-varying parameters to solve this identification problem for Brazil in the period 1996-2019. Regional series of unemployment and inflation of non-tradable goods were built. It was found that the Brazilian Phillips curve existed during most of the period, but it lost its slope during the monetary regime transition. The main consequence of these findings is for the conduct of monetary policy. With a weaker relationship between unemployment and inflation, the Central Bank has less control over inflation through reduction of the aggregate demand. Thus, the control over expectations has a heavier weight on the conduct of monetary policy.
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Atualizado em 14/08/2025