Inflation Targeting and the Fiscal Policy Regime: The Experience in Brazil

9 Pages Posted: 27 Apr 2005

See all articles by Francesco Giavazzi

Francesco Giavazzi

National Bureau of Economic Research (NBER); University of Bocconi - Innocenzo Gasparini Institute for Economic Research (IGIER); Centre for Economic Policy Research (CEPR)

Abstract

This article reviews the recent experience of Brazil showing that credit risk is at the centre of the mechanism through which a central bank might lose control of inflation. Brazil during 2002 came close to a situation where fiscal policy hindered the effectiveness of monetary policy. But in early 2003 a change in investors' perception of the long-run fiscal stance brought the economy back to normal conditions, reducing credit risk, stabilising the exchange rate and, through these two variables, inflation expectations, inflation and the dynamics of the public debt. Brazil's experience could thus offer useful lessons for other emerging market economies, which consider adopting inflation targeting as their monetary policy rule.

Suggested Citation

Giavazzi, Francesco and Giavazzi, Francesco, Inflation Targeting and the Fiscal Policy Regime: The Experience in Brazil. Bank of England Quarterly Bulletin, Autumn 2003, Available at SSRN: https://ssrn.com/abstract=706963

Francesco Giavazzi (Contact Author)

National Bureau of Economic Research (NBER)

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Centre for Economic Policy Research (CEPR)

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