Markets, Politics, and Learning: Explaining Monetary Policy Innovations in Brazil

Abstract

An increasing number of developing and emerging economies have adopted an inflation targeting framework for monetary policy during the last two decades. This article investigates the politics of inflation targeting by focusing on the case of Brazil. I argue that the decision to implement an inflation targeting system in 1999 did not only reflect the concerns of political leaders with maintaining electoral support and external credibility. In addition, the choice of this new policy approach was informed by a shift in the technical consensus among Brazilian economists about the most effective way to tame inflationary pressures in a context of high capital mobility. The shift to inflation targeting thus reflected a process of social learning among technical elites, facilitated not only by the failure of the previous policy but also by the successful experience of other inflation targeting countries. Moreover, the evidence presented here suggests that, as the first country to adopt inflation targets in the context of an IMF-supported program, Brazil became a test case and a natural experiment for the redefinition of IMF conditionality and surveillance mechanisms. The paper thus sheds light on a process of reciprocal learning, whereby the IMF not only contributed to collective learning but also learned from the Brazilian case, subsequently becoming an active promoter of inflation targeting among developing countries.

Currency wars in the advanced world: Resisting appreciation at a time of change in central banking monetary consensus

“…One of the policy consequences of this view is the diffusion of (variably flexible) inflation--targeting frameworks intended to induce policymakers in both developed and developing economies to make sensible monetary policy decisions (Gòmez--Mera, 2011;Martìnez, 2009: 85). ix Even central banks that do not consider themselves to be primarily targeting inflation, such as the European Central Bank (ECB) and the Swiss National Bank, have nonetheless incorporated key features of this policy framework, which includes a numerical definition of price stability, a central role for communications about the economic outlook, and a willingness to accommodate short--run economic stabilization objectives as long as these objectives do not jeopardize the primary goal of price stability (Issing, Gaspar, Angeloni and Tristani, 2001;Baltensperger, Hildebrand and Jordan, 2007).…”