Monetary Policy and Exchange Rate: Effects on Disaggregated Prices in a FAVAR Model for Brazil

Abstract

This paper investigates the effects of monetary and exchange rate shocks on disaggregated prices of the Brazilian Consumer Price Index (IPCA), from 1999 to 2011, using a factor-augmented vector autoregressive model (FAVAR). We estimate the model with Bayesian techniques, and construct impulse-response functions using sign restrictions over the responses of macroeconomic variables. The main results are: a) taking into account the weights, 50% of the rates of price change at the sub-items level fell after a monetary shock and 40% rose after exchange rate's shock; b) only 0.3% of the sub-items showed price puzzle for monetary shocks and 4.7% for exchange rate shocks; c) macroeconomic shocks are more persistent than series-specific shocks; d) for the sub-itens, series-specific shocks are the main determinants of the variance, but macro shocks are more influent over aggregated series e) the answers are different according to the sector considered.