Endogeneity and nonlinearities in Central Bank of Brazil’s reaction functions: an inverse quantile regression approach

Abstract

In this work, we seek to investigate nonlinearities in the reaction function of the Central Bank of Brazil (CBB) by estimating quantile regressions. As the monetary policy rule has endogenous regressors, we use the method of inverse quantile regression, proposed by Chernozhukov and Hansen (Econometrica 73:245–261, 2005). In general, we noted that the linear reaction function properly describes the conduct of monetary policy in normal periods. However, we found that quantile regression estimates allow identifying nonlinearities in the CBB’s policy in periods with large shocks to the inflation rate, output, and exchange rate, as occurred in the exchange rate crisis in 2003 and in the economic crisis in 2008.