Regime-dependent Price Puzzle in the Brazilian Economy: evidence from VAR and FAVAR approaches.

We investigate whether the price puzzle, found in previous empirical studies, consists of model misspecification or a feature of the economy. To analyze the anomaly, we estimate the central bank's reaction function through the standard VAR and FAVAR approaches, spanning the period from July 2003 to June 2018. The results suggest that the price puzzle stands out as a feature of the economy only at intervals of activity slowdown. The data consists of the 71 indicators potentially used by the Brazilian Central Bank in formulating monetary policy. Note that “SA” stands for series seasonally adjusted by the source and “*” denotes series seasonally adjusted by the Census X-13 ARIMA methodology (US Census Bureau). The transformation codes are: 1-No transformation; 2-First difference; 3-Logarithm; and 4-First difference of logarithm. The "S/F" stands for “Slow-moving” (S) and “Fast-moving” (F). The sources of the time series used in our study are as follows: the Brazilian Steel Institute (IBS), the State System of Data Analysis, Research and Unemployment Foundation (SEADE), the Center Foundation for Foreign Trade Studies (FUNCEX), the Brazilian Association of Financial and Capital Market Institutions (ANBIMA), the Institute of Applied Economic Research (IPEA), the National Confederation of Industry (CNI), the Brazilian Central Bank (BCB), the Brazilian Institute of Geography and Statistics (IBGE), the Brazilian Ministry of Labor (ML), the Brazilian Foreign Trade Secretary (FTS), the Brazilian stock market exchange (BMF Bovespa), the Getulio Vargas Foundation (FGV, Brazilian economic research institution), the JP Morgan, the Investing (US-based financial investment company), the US Bureau of Labor Statistics (BLS), the Federal Reserve Bank (FED), the Organization for Economic Cooperation and Development (OECD), and the International Monetary Fund (IMF). Importantly, the CDI is the average interest rate, indicative against which a representative group of banks makes unsecured loans to each other in the Brazilian financial market. The swap DI x Fixed Interest Rate is floating for a fixed swap contract . The IPCA, IPC, and INPC are consumer price indexes with different building methodologies. The IPADI is a producer price index. The INCC measures the changes in prices of the construction sector. The IPCA index is composed of free and state-regulated prices. The formers are determined by market supply and demand and comprise the prices of food, beverage, housing, household items, clothing, personal expenses, and education (IPCA Free Prices). The IPCA Free Tradable Prices index is composed of prices of goods that have free prices and are internationally traded. The IPCA Core Prices index is a measure that aims to capture the price trend, excluding the disturbances caused by temporary shocks. The IGPDI and IGPOG are both hybrid price indexes with different methodological approaches