Brazil Through the Eyes of CHORINHO

Abstract

CHORINHO, a medium scale DSGE model used in the financial sector to inform investment decisions, consists of a small open economy version of Smets and Wouters (2007) with a financial accelerator mechanism, adapted for estimation with Brazilian data. Marginal likelihood comparisons indicate that the model compares favorably to Bayesian Vector Autoregressions that use Sims and Zha (1998) priors. The model is used to (i) identify the reasons behind recent deceleration episodes, (ii) study the effects of currency depreciation, and (iii) investigate whether monetary policy has recently become more powerful.