Macroeconomic uncertainty and monetary policy transmission in Brazil: a TVAR approach

Abstract

ABSTRACT This article assesses the impact of uncertainties on the effectiveness of monetary policy in Brazil after the adoption of the inflation-targeting regime. We employ the methodology of autoregressive vectors with an endogenous threshold (TVAR) with a general uncertainty indicator (IGI), proposed as a linear combination of four existing proxies for the Brazilian context. The sample covers 2003 to June 2022 at a monthly frequency. The results show the IGI variable has the highest degree of correlation with economic recessions in the country among all the analysed indicators. Moreover, in regimes of high uncertainty, the responses of the output gap, inflation, and inflationary expectations to interest rate shocks are severely reduced. Therefore, we conclude that an increase in macroeconomic uncertainties can reduce the effectiveness of monetary policy in Brazil.