International cost-push inflation and monetary policy in Brazil

Abstract

Exchange rate and commodity prices are often considered primary drivers of inflation in Brazil. However, international cost shocks from intermediate inputs are less studied. We estimate a Structural VAR model including a Foreign Producer Price Index, measuring cost changes of Brazilian trade partners in the period 1999–2020. Estimates show a positive effect of the Foreign PPI on the Brazilian Consumer Price Index, providing a relevant explanation for domestic inflation. Consistently with the empirical literature, our results underscore the Exchange Rate as the main determinant of the CPI. Our findings highlight the predominance of shocks related to the external sector (Exchange Rate, Foreign PPI, and Commodity Prices) in explaining inflation in Brazil. Since the international shocks and Foreign PPI are beyond the direct influence of the Central Bank, our results confirm that the inflation targeting regime in Brazil relied mainly on the exchange rate effect following changes in the interest rate.