Dynamic structural econometric models and high inflation in Brazil

The properties of the monetary system in Brazil, during the high inflation period (1980-1995) are investigated. A literature review emphasizing empirical attempts is carried out. The evidence in the literature shows that the Cagan model is a good specification for the money demand prior to 1986. Nevertheless the results of the present doctoral thesis show that from 1986 onwards after the first stabilization plan started the empirical evidence does not support the Cagan model. Alternatively a dynamic structural econometric model (SEM) is proposed. The sample size is divided into three distinct periods: 1. 1980 until 1986(2), 2. 1986(3) until 1994(6) 3. 1994 until 2002(2). A long run money demand equation is identified in the second and third periods. The results for the first period support the view that the accommodating monetary policy (M1) followed after the 1984 economic upturn in a highly indexed economy allowed the increase in the inflation rates. In period 2 the short run price dynamics depicted the presence of memory in the process reflecting indexation. The long run response to shocks in inflation is positive representing a long run increasing trend. The influence of the administered exchange rate devaluations and nominal wage inflation on price dynamic is investigated. For the first period in the short run the impact of inflation on industrial activity originated in the nominal wage inflation not in price inflation. In the second period the short run model dynamics shows the growth in the industrial production and inflation rate being driven by past inflation (wage and prices) in line with the theoretical model proposed.