Introduction to the Special Issue on DSGE Models for the Brazilian Economy

Abstract

Dynamic Stochastic General Equilibrium (DSGE) models have become the
 standard framework for quantitative macroeconomic analysis in the world. Naturally,
 there is now a growing literature on DSGE models designed to study the
 Brazilian economy. A conference organized by the Centro Macro Brasil of the
 Sao Paulo School of Economics – FGV, sponsored by the Instituto de Pesquisa
 Econˆomica Aplicada (IPEA), on August 22, 2014 featured papers using DSGE
 models applied to Brazil. This special issue of the Brazilian Review of Econometrics
 contains five papers presented in the conference.
 The Brazilian Central Bank (Banco Central do Brasil) has its own DSGE
 model, the so-called SAMBA. The paper that presents and analyses the model,
 by Marcos de Castro, Solange Gouvea, Andr´e Minella, Rafael Santos and Nelson
 Souza-Sobrinho, leads this special issue. SAMBA is a large scale DSGE model
 with a few features designed to bring it closer to the Brazilian economy, namely,
 the presence of administered prices, an explicit target for the primary surplus,
 a fraction of households with no access to financial markets, external finance of
 imports, and imports used as inputs in the production function. SAMBA can be
 used as a tool for forecasting and for assessing the impact of different shocks.
 The second paper in this volume, by Fabio Kanczuk, shares the same objectives
 but employs a medium scale DSGE model of a small open economy. The model is
 then estimated to understand which shocks can explain the observed fluctuations
 in output in the last 15 years. The model is also used to assess the economic
 impacts of a hypothetical currency depreciation and to check the hypothesis that
 monetary policy has become more powerful over time in Brazil.
 The next paper in this volume, by Marco Cavalcanti and Luciano Vereda,
 builds a DSGE framework with a rich modeling of the public sector that explicitly
 considers public employment as well as other types of public expenditures, public
 investments and transfers. The model also incorporates a fairly detailed fiscal apparatus
 comprising several policy instruments both on the taxation and spending
 sides, and considers different fiscal rules. The model is thus able to quantify the
 macroeconomic effects of shocks to different types of fiscal policy in the short and
 medium run.
 The fourth paper in this volume, by Vladimir Teles, Celso Costa J´unior and
 Rafael Rosa, presents a DSGE model with two sectors that incorporates technical progress in the investment goods sector. This is motivated by evidence of the
 importance of this channel that they also document in the paper. They show
 that incorporating productivity shocks specific to the investment goods sector in
 the model affects the results in important ways. In particular, optimal monetary
 policy is more rigorous than in standard models.
 Most DSGE models applied to the Brazilian economy do not use data from the
 periods preceding the adoption of the inflation targeting regime in 1999. In the
 last paper of this volume, Carlos Carvalho and Andr´e Vilela build a DSGE model
 to investigate the transition between the different exchange rate (and monetary
 policy) regimes that took place in 1999. Their results support the transition to
 the inflation targeting regime in 1999, but suggest that an earlier transition in the
 first half of 1998 might have been even better.
 The papers in this special issue highlight the main advantages of the use of
 DSGE models for quantitative macroeconomic analysis. As put by Kanczuk, a
 DSGE model “forces one to think in terms of exogenous shocks and endogenous
 responses, and thus to ask sensible questions”. Castro et al. add that DSGE
 models “can be successfully used as a story-telling device in the policymaking
 process.” We hope that by bringing together a number of papers applying the
 DSGE methodology to study the Brazilian macro economy, this volume serves
 both as a useful guide to and as an inspiration for researchers interested in working
 in this area.