Monetary Policy, Commodity Prices and Credit in Brazil: A SVAR Approach

Abstract

This study aims to analyze, leaning on a structural autoregressive vector (SVAR), whether external variables, such as the commodity price index and the US GDP, are relevant to consistently capture the dynamic interaction between credit and important domestic variables in Brazil, namely, GDP, inflation, interest rate and exchange rate. Shocks to the interest rate happen to be important for credit dynamics. At short horizons, shocks to credit itself play a greater role in explaining this variable. At long horizons, shocks to commodity prices are taken to be a respectable player in credit growth. The results also indicate that a positive shock to the interest rate implies a reduction in Brazilian GDP, remaining below its baseline. In turn, a positive shock to credit gives rise a small growth in Brazil’s GDP during a quarter, returning, thereafter, to its baseline. Finally, in the long run, the variance decomposition shows that shocks to commodity prices explain about 67%, 47%, 43% and 15% of the forecast error related to Brazilian GDP, credit, exchange rate and interest rate, respectively. This fact can be taken as an important determinant toward the dynamics of domestic variables in Brazil.