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Dissecting inflation in Brazil
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This paper investigates the short and long-term dynamics between inflation and four variables – money supply, real broad effective exchange rate, real interest rate and unemployment – in Brazil. The data sample ranges from 2002 until 2018. I make use of a vector error correction model and find that every explanatory variable is statistically significant in explaining inflation over the short and long-run. Except for the real interest rate, the individual relationships are in accordance with the findings of relevant literature. I also compare the model’s out-of-sample performance with the top short-run Brazilian CPI forecaster, as selected by the Brazilian Central Bank.
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Inflation Brazil VECM Forecast