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Working Paper Series Brasília n. 218 Oct. 2010 p. 1-43

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The first assumption is equivalent to a cash-in-advance constraint but in the produc- tion side. The impact on equilibrium employment will depend on the nature of labor supply. Because standard business cycle models of small open economies are unable to do the job. The model departures from the standard business cycle literature in two important ways. Both assumptions are crucial for generating counter-cyclical interest rates. GHH preferences imply that the marginal rate of substitution between consumption and leisure does not depend on consumption. show a different pattern: (i) con- sumption is more volatile than output. trade balance is weakly counter-cyclical or pro-cyclical. a fall in labor demand induced by higher interest rates unambiguously reduces equilibrium employment and aggregate output. (ii) net exports are counter-cyclical and (iii) interest rates are very volatile. I closely follow Neumeyer and Perri (2005). Hence. however. which makes the labor supply a function of the real wage only. The next logical step would be to replicate such findings in a coherent quantitative model. I assume that preferences are such that consumption and leisure are non-separable and labor supply is independent of consumption (GHH preferences). (1988). 4 . A large literature has documented the business cycles properties of mature open economies and found that consumption is less volatile than output. Backus et al. the non-separability of GHH preferences implies that expected consump- 1 See Mendoza (1991). Correia et al. firms must borrow to finance their working capital. positively correlated with trade balance and lead the cycle2 . Such an exercise is not only interesting by itself but also of central relevance for policy-makers and market participants. 2 See Neumeyer and Perri (2005) and Aguiar and Gopinath (2007). The second assumption is now popular in small open economy models and has the purpose of making labor supply more responsive to wages. Second. hence firms must borrow from credit markets to finance part of their working capital needs. and interest rates are pro-cyclical1 . Additionally. who use a similar model to study the Argentine case. Therefore. reducing firms’ net revenues and labor demand.1 Introduction This paper analyzes the relationship between real interest rates and the empirical regu- larities of the Brazilian business cycles in recent years. Using quarterly data covering the period 1994:IV-2010:I. In the model. it assumes that payments and receipts are not perfectly synchronized at the firm level. as in Greenwood et al. an increase in the interest rates raises the cost of working capital. (1995) and Schmitt-Grohe and Uribe (2003). further modifications must be made in order to make sense of the empirical properties found in the data. First. (1992). The data for emerging market economies. counter-cyclical. I also find similar empirical regularities for Brazil.

he concludes that interest rates shocks in Brazil are mainly determined by domestic factors such as changes in the government fiscal policy. Here. This was probably true until mid- 1990s. it can explain about a third of output fluctuations. Few papers have tried to understand the Brazilian business cycles through the lens of real business cycles (RBC) models. I find that the relevant changes in interest rates may be viewed as coming from exogenous shifts to the country risk premium. they assume that firms must advance 100 percent of wages before production is sold. and no regard with fiscal discipline. One exception is Kanczuk (2004). Neumeyer and Perri assume that firms demand working capital in order to pay for the labor cost up front. i. When country interest rate shocks are the only source of disturbances. Neumeyer and Perri consider interest rate shocks generated by shifts in the country risk that are related to domestic fundamentals. The model in this paper departs from Neumeyer and Perri (2005) in two dimensions. defined as the spread over the international risk-free rate. Neumeyer and Perri also find that interest rate shocks can account for a large fraction of output fluctuations in Argentina (about 27 percent)3 . has changed after mid-1990s. who analyzes the role of interest rates in a closed-economy environment. with the improvements in domestic fundamentals. The model is calibrated to the Brazilian economy for the period 1994:IV-2010:I. Using data for the 1980s and 1990s. Neumeyer and Perri find that movements in country interest rates caused by endogenous shocks to the country risk premium are very important for explaining the Argentine’s business cycles. This is the key mechanism that makes consumption more responsive than output to changes in interest rates and hence more volatile than output over the business cycle. In fact. productivity growth. small integration with the world economy. Additionally. 5 . Section 2 summarizes the empirical regularities of business cycles in Brazil. Section 3 presents the model. without having to identify how they use working capital. First. Second. Therefore. I adopt a different route and simply assume that firms have to put aside a fraction of their production as working capital.. However. a parsimonious version of the model with country risk shocks alone is able to replicate most of the business cycle properties of the Brazilian economy in recent years. This paper proceeds as follows. In the Brazilian case. and also indirectly through the labor market chan- nel.e. the responsiveness of the economy to exogenous interest rate shocks caused by shifts in foreign investors’ risk aversion. as in the standard model. an interest rate shock affects consumption growth directly. The model takes into account this important feature of the Brazilian data.tion growth depends not only on interest rates but also on future expected movements in equilibrium employment. This allows to calibrate the working capital parameter directly. a period of high inflation rates. contagion effects and political uncertainty. discusses the market equilib- 3 In the Argentine case. as I argue in this paper.

2002-03 and 2008-09. Panel (a) of Figure 1 shows the behavior of the Brazilian interest rate. As described in Appendix A. At that time. Figure 2 illustrates the positive correlation between the interest rate and the trade balance. and its fluctuations are mainly driven by fluctuations in the country spread.rium and describes its dynamics. It also highlights (by shaded areas) the four main output downturns Brazil experienced in the last fifteen years: 1995. Lastly. whereas Figure 3 depicts the cross-correlation between GDP and real interest 4 The severity of the last recession is also associated with other transmission channels such as private agents’ expectations and the collapse of world trade and trade credit. The 2002-03 recession is related to the contagion from the Argentine crisis and to uncertainties surrounding the election of a left-wing president. the empirical measure of the real interest rate I use is defined as the three-month US treasury bill rate plus the appropriate Brazilian sovereign spread. 6 . The empirical regularities I find for the Brazilian data agree with most stylized facts for emerging economies discussed in Section 1. the country risk premium. in part because some domestic fundamentals (e.g. the 1995 recession is associated with the Mexican crisis that contaminated most emerging markets. In fact. 2 Brazilian Business Cycles: 1994-2010 I use quarterly data from 1994:IV to 2010:I. A detailed explanation of the data-set used in this paper can be found in the Appendix. the 2008-09 recession was associated with the world financial crisis triggered by problems in the US sub-prime mortgage market. A similar situation occurred in 1998 due to the Russian crisis. without any significant change in domestic fundamentals. These four recessions were preceded by increase in the interest rate. both deflated by ex-post inflation.. Section 4 presents the quantitative results. the Brazilian monetary authority was forced to raise the domestic interest rate in order to stabilize the currency and avoid capital outflows. The country interest rate is about four times more volatile than the US rate. Panel (b) illustrates the negative relation between interest rate and domestic output. which contributed to trigger the abandonment of the exchange rate peg in January 1999. and the US interest rate. Section 5 concludes. large international reserves) started to play a key role as buffers against external shocks4 . covering all years since the launching of the Real Plan stabilization program. 1998-99. The spread is the premium of dollar-denominated Brazilian bonds over US treasury bonds of comparable duration. over the business cycles. the country risk premium did not increase as sharply as in the previous episodes. Despite the severity of this last crisis.

. standard RBC models usually underestimate the relative (to output) volatility of consumption. while in Canada they are strongly pro-cyclical. In the beginning of each period.. Below I specify the behavior of firms and households along the time-line. Additionally. 3 Model This section describes a model economy in which the empirical regularities discussed above can be interpreted as the equilibrium of a small open economy subject to technology shocks. (ii) net exports and interest rate are counter-cyclical. Since there is no comparable series of hours worked I use information on employment for both countries. inputs markets and goods markets. The model I present in the next section is intended to overcome these limitations and to better replicate the empirical facts. indicating a two-quarter phase shift in the interest rate cycle. The Brazilian data agree with the stylized facts mentioned in Section 1: (i) consumption is more volatile than output. credit and goods markets open again and all remaining transactions are concluded. Standard RBC models are unable to replicate the main empirical findings for the Brazilian economy. Lastly. indexed by t = 1. At the end of the same period. Time. Canada. 3. The highest correlation coefficient between the interest rate and GDP occurs for the interest rate in t − 2 and the GDP in t. international interest rates shocks and country risk shocks. which is taken as given.. Table 1 compares Brazilian business cycles with those of Canada. the relevant interest rate is the world rate. 2. 0 < α < 1 7 . Figure 4 describes the time-line of events. exhibits a completely different pattern. .1 Firms Firms operate in perfectly competitive markets and use a standard Cobb-Douglas produc- tion function to transform capital and labor into an internationally tradable commodity: Yt = ezt Kfαt L1−α ft . The U-shape pattern suggests that interest rates lead the cycle in Brazil. all shocks are revealed and decisions take place in three markets: credit markets. while in Canada it is less volatile.rate in Brazil and in a benchmark small open developed economy (Canada). In the standard model. technology shocks are the main driving-force of economic fluctuations. is discrete and a period is a calendar quarter. on the other hand. a fact that Neumeyer and Perri (2005) also observe in Argentina and in other emerging market economies. and (iii) interest rate is very volatile compared to that of Canada.

Additionally. Hence. To capture the empirical evidence discussed in Section 2. 1 − Lt ) = (Ct − ψLνt )1−σ . ν > 1 1−σ GHH preferences have been used in many small open economy models. Correia et al. Lf t is the labor input and zt is a random productivity shock which is assumed to follow a first-order Markov process.where Yt denotes output in period t. To simplify. . Kf t is the stock of capital. Households own an initial stock of capital K0 . In the beginning of each period. Without working capital constraint. In particular. 0 < β < 1 t=0 where u(. 3. The household maximizes its expected utility defined over random sequences of consumption Ct and leisure 1 − Lt : ∞ max E0 β t u(Ct . Therefore. ψ > 0. However.) is an instantaneous GHH utility function: 1 u(Ct . 8 . which is allocated between leisure and market activities. firm profits in period t are: πf t = max {[1 − θ(Rt−1 − 1)]Yt − wt Lf t − rt Kf t } where θ(Rt−1 − 1) is the net interest payment. and an initial stock of non- contingent foreign bonds B0 that pay a stochastic gross interest rate Rt . θ = 0. including Mendoza (1991). 1 − Lt ). In the beginning 5 We can interpret the unsold production as inventories or accounts receivable maturing at the end of the period. they only sell a fraction 1 − θ of their production5 . At the end of each period. Each household has an endowment of time normalized to unity.2 Households The economy is populated by a mass one of infinitely lived households. I assume that firms face working capital constraints.. which they rent to firms and may augment through investment. Kanczuk (2001) concludes that GHH preferences are crucial for generating the cyclical properties consistent with the Brazilian data. (1995) and Neumeyer and Perri (2005). the profit function reduces to the usual one. they sell the remaining output θYt and pay θYt Rt−1 for the working capital they borrowed. firms have to pay for labor services (wt Lf t ) and capital services (rt Kf t ) they rent. I abstract from population growth and technology progress and represent all variables in per capita terms. they must borrow θYt from foreign lenders and/or domestic households at the interest rate Rt−1 to pay for the input services. I suppose that payments and receipts are not perfectly synchronized.

They find that the three models deliver identical business cycle dynamics. lend working capital. φK > 0 where δ is the depreciation rate and φK is the capital adjustment cost parameter. 9 . Their period budget constraint is given by: Ct + It + Bt + φB (Bt ) ≤ wt Lt + rt Kt + Rt−1 Bt−1 (1) where It is investment in capital. I assume a quadratic adjustment cost for bond holdings:  ¯ 2 φB Bt B φB (Bt ) = Yt − ¯ . households rent capital and labor to firms. transaction costs and to purchase (or sell) new debt. Kt+1 ). At the end of each period. The resources used for investment add to the current stock of capital and covers adjustment costs: It = Kt+1 − (1 − δ)Kt + φK (Kt . Note that in steady state φB (B) ¯ K)¯ = 0. Bt−1 is the debt contracted in the previous period at the gross interest rate Rt−1 . φB > 0 2 Yt Y ¯ where YB¯ is the ratio of bond holdings to GDP in steady state. I assume that the capital adjustment cost is also quadratic: φK (Kt+1 − Kt )2 φK (Kt . 6 Schmitt-Grohe and Uribe (2003) study three different ways to make small open economy models stationary: endogenous discount factor. the adjustment costs do not affect the long-run properties of the model. As usual. This artifact is commonly used in the business cycle literature to dampen the excess volatility of investment generated by small open economy models. Bt is the new debt purchased at t and maturing next period. Portfolio adjustment costs are commonly used in small open economy models to ensure that bond holdings are stationary6 . The term φB (Bt ) denotes the cost of adjusting bond holdings. households use their proceeds to pay for consumption. and buy a fraction 1 − θ of the produced output. For simplicity. as measured by unconditional second moments and impulse response functions. φK > 0 2 Kt ¯ = φK (K. wt is the competitive wage rate and rt is the competitive rental rate of capital. Kt+1 ) = . investment. Hence. debt-elastic interest rate premium and convex portfolio adjust- ment costs.of each period.

in the data they display a unexpected negative but small correlation over the business cycle. Let pt denote the probability of confiscation and let τt be the confiscation rate. For simplicity. ρz ∈ [0. Several authors. 1) (5) D Regression results show that there is no significant positive correlation between the in- novations to the US interest rate and those to the Brazilian country risk. I assume that fluctuations in the country spread are mostly driven by exogenous shocks. εz ∼ N (0. εD ∼ N (0. I assume the following form for the exogenous country risk: ˆ t = ρD D D ˆ t−1 + εDt . which also follows a first-order autoregressive process: ˆ ∗ = ρR ∗ R R ∗ ˆ t−1 + εR∗ t . 0 < ρR∗ < 1 (4) t where the hat denotes deviation from the trend. including Edwards (1984). εR∗ ∼ N (0.3 Shock Processes There are three potential sources of shocks in the model: productivity shocks. Min (1998) and Kamin and Kleist (1999) have also found that changes in the world interest rates have no significant impact on bond spreads of developing countries. ρD ∈ [0. σε2R∗ ). σε2 ). then the interest 10 . both following exogenous stochastic processes. To be consistent with the evidence of Section 2. 1) (2) The gross real interest rate faced by domestic households and local firms is given by: Rt = Rt∗ Dt (3) where Dt is the spread (country risk premium) over the international risk-free interest rate Rt∗ . face a perfectly elastic supply of funds and always lend positive amounts to domestic residents. σε2z ). even though such evidence still is a matter of debate in the literature.3. world interest rate shocks and country risk shocks. If foreign lenders are risk-neutral. such as shocks to foreign investors’ preferences for risk. contagion effects and political factors. The productivity shock is a standard first- order Markov process of the form: zt = ρz zt−1 + εzt . I assume that εR∗ t and εDt are orthogonal. Neumeyer and Perri (2005) argue that a simple way to justify the country risk premium is to assume that residents always pay their obligations in full but there is a positive probability that the local government will confiscate all the interest payments. The country spread is a measure of the default risk on payments to international lenders. In fact. Hence.

rate paid by domestic agents must satisfy Rt∗ = (1 − pt )Rt + pt (1 − τt )Rt . (ii) firms maximize their profits and (iii) all markets clear: Goods M arket : T Bt = Yt − Ct − It − φB (Bt ) Capital M arket : Kt = Kf t Labor M arket : Lt = Lf t where T Bt is the country’s trade balance. Kt+1 }∞ t=0 for house- holds.4 Competitive Equilibrium A competitive equilibrium for this economy is an allocation {Ct . rt . shifts in the perception of risk would also increase the country spread. Rt }∞ ∞ t=0 such that given these prices (i) households maximize their lifetime flow of utility subject to (1) and to a non-Ponzi game condition. In a more realistic setup where foreign lenders are unable to completely diversify their portfolio. 3. taking as given the initial values of capital K0 and debt B0 . Lf t }t=0 for firms and a sequence of prices {wt . Lt . an allocation {Kf t . The competitive equilibrium is characterized by the following dynamic system of equations: Ct + It + Bt + φB (Bt ) = [1 − θ(Rt−1 − 1)]Yt + Rt−1 Bt−1 (6) Yt ψνLν−1 t = (1 − α)[1 − θ(Rt−1 − 1)] = wt (7) Lt   ¯  Bt B λt 1 + φB − ¯ = Et βλt+1 Rt (8) Yt Y    Kt+1 λt 1 + φK −1 = Et βλt+1 RKt+1 (9) Kt 11 . or are risk averse. Bt . exogenous changes in the probability of confis- cation and in the confiscation rate are the mains sources of fluctuations in the country risk. which implies that the country risk premium is given by: 1 Dt = 1 − pt τt In this simple risk-neutral environment.

Note that a rise in the interest rate increases the effective labor cost and thus reduces firm’s demand for labor. which is a value widely used in the literature for both developed and developing countries. a reduction in the labor demand implies that both equilibrium employment and output fall unambiguously. The term in brackets comes from the working capital constraint in the firms’ problem. The proxy for firm nominal output is total net revenues. hence the working capital constraint imposes a real loss on the economy. The depreciation rate δ is set to 0. (1995).where λt = (Ct − ψLνt )−σ is the lagrange multiplier on the household’s  budget constraint  2 Yt+1 Kt+2 (1) and RKt+1 ≡ α[1 − θ(Rt − 1)] K t+1 + 1 − δ + φ2K Kt+1 − 1 is the expected return on capital taking into account the adjustment cost. The weighted (by firm assets) average of this 7 See Correia et al. Its left-hand side is the labor supply and its right-hand side is the labor demand. Equation (7) is the equilibrium condition in the labor market. When θ > 0.025. equations (8) and (9) are the accumulation equations for bond holdings and capital.1 Calibration The parameters ν and σ are calibrated beforehand. without direct counterpart in the Brazilian data. there are less resources available for consumption and investment. I use the following definition: W orking Capital θ= PY The empirical counterpart of θ is the amount of working capital needs relative to firm output. The amount of working capital needs is the difference between “working assets” (short-term plus medium-term assets) and “working liabilities” (short-term plus medium-term liabilities. I use an unbalanced panel of 2158 non-financial Brazilian firms for the second half of the 1990s to calculate both variables. The discount factor β is chosen to match the average real interest rate of 2. I perform sensitivity analysis to assess the impact of its choice. Equation (6) is the economy-wide resource constraint. Since the income effect is null under GHH preferences. Kanczuk (2001) and Neumeyer and Perri (2005). This result is absent from standard preferences such as Cobb-Douglas in which the resulting equilibrium will depend on the size of the income and substitution effects. 12 . augmented by the adjustment cost terms. Since the choice of ν may raise controversy. 4 Results 4.3 per cent a quarter. To calibrate the working capital parameter θ. Finally. respectively. excluding financial debt). I follow the literature and set ν to 1.5 and σ to 2 7 .

given the Brazilian fast credit growth in recent years. For instance. 10 The relative volatility of investment in the model with these shocks is the average across 10000 simulations. which are larger and less credit-constrained than the firms in my sample. The second is the market of long-term loans. In fact. This figure is larger than the available estimates of working capital needs in Brazil. the aggregate ratio of short-term loans by commercial banks to GDP averaged 0. dominated by the Brazilian Development Bank (BNDES). The capital adjustment cost parameter φK is calibrated so that the relative simulated volatility of investment matches the actual relative volatility when either the US interest rate or the country risk premium shock or both plus the TFP shock are turned on10 .2 as the benchmark value. Kanczuk uses information only for companies listed at the Sao Paulo stock exchange (BOVESPA). I also provide sensitivity analysis to evaluate the impact of this choice on the quantitative results9 . Kanczuk only considers short- term assets and short-term liabilities. Second. The parameter α is chosen to match the following steady state relation: ¯ − 1)] Capital Share = α[1 − θ(R Since there are no reliable estimates for quarterly hours worked in Brazil over the sample period. which is in the middle range of the available estimates. As for the micro evidence. which implies a value of 2.35. I use micro data to calibrate L.32 and 0.39 during the sample period.11. Therefore. ¯ The average weekly hours per worker based on the National Household Survey (PNAD) for the years 1995-2008 was about 1/3 of the total time available. The steady state asset holdings of households are calibrated to match the actual net foreign debt.06 in 1996 to about 0. I set θ = 0. 13 . whereas due to data availability I had to include assets and liabilities with longer duration. whose average was -65 percent of GDP during 1994-2010.working capital measure ranged between 0.10 during 1996-20108 .12 in 2010. with a time average of 0. The evidence (not shown here) clearly suggest that the policy interest rate Selic reacts to interest rate shocks and that domestic borrowing and lending rates react to changes in the Selic rate. 9 One might argue that even if the true working capital needs are known there still remains the question of whether shocks to interest rates are indeed transmitted to working capital finance. The bond holdings adjustment cost parameter φB is set to the minimum value that guarantees a stationary level of foreign debt in equilibrium. There are two important differences between my estimates and Kanczuk’s. using similar computations and firm-level data from 1996 to 1999 Kanczuk (2004) finds a ratio of 0. which is basically the most important domestic source of funds for long-term projects. The first is the market of short-term (or freely allocated) loans by commercial banks to finance firm working capital and household consumption. each with 62 observations as in the data. First.90 for ψ. based on both aggregate and firm-level data. the ratio doubled from 0. 8 There are two credit market segments in Brazil. The problem with the aggregate proxy is that it is not stable overtime.

as well as a relatively large drop in consumption and investment. which is at odds with the data. Larger values of s and θ 14 . As expected. the economy experiences an export boom on impact. 4. notice that labor and output respond with a lag because the interest rate is a pre-determined variable. the reaction of the economy to a technology shock resembles the response of a standard RBC model. For the technology process (2). Because the change in the capital stock induced by interest rate shocks is relatively small. a 1 percentage point (p. First. shocks to the US rate and to country risk have substantially different effects through the interest rate channel.p. Figure 5 shows the impulse responses to a 1 percent decrease in technology (Panel a). On the other hand. US interest rate and the country risk. considering a capital adjustment cost parameter of 78. The parameters of the shock processes are calibrated as follows. d = −1/α is the wage elasticity of labor demand and s = −1/(1−ν) is the wage elasticity of labor supply. which are larger than that of output a quarter later. In particular. consider the log-linearized version of (7) and (8) around their steady states (assuming no technology shock): ˆ ˆ ˆlt = αkt − ϕRt−1 (10) 1/s − 1/d    1 ¯ ˆ   ct+1 − cˆt ) = Et Et (ˆ 1− ¯ ˆlt+1 − ˆlt Rt +  (11) σ ν where  ¯ C¯ and ϕ ≡ (1 − α)θR ¯ ≡ w¯ L/ ¯ Y¯ /w ¯L¯ are steady state constants. Table 2 summarizes the baseline parameter values.95 and σε is such that the simulated volatility of GDP matches the actual volatility when the three shocks are turned on. Notice that labor is as volatile as output in Panel b and more volatile than output in Panel c. I assume that is ρz 0. Therefore. The parameters of the international interest rate (4) and the country risk (5) are obtained by simple OLS regressions. expression (10) shows that the impact of interest rate shocks on labor mainly depends on the elasticities and on the size of the working capital constraint. increase in the country risk premium (Panel c). given the capital adjustment cost parameter. when the interest rate channel is operative the model is able to generate counter-cyclical trade balance and consumption responses that are more volatile than those of output.) increase in the US interest rate (Panel b) and a 1p. To better understand why labor and consumption are more sensitive than output to interest rate shocks. On the other hand.2 Impulse Responses This section shows the responses of the main macroeconomic variables to shocks in aggre- gate productivity.p. consumption and investment respond less than output and trade balance is pro-cyclical.

and output by about (1 − α)0. weighted by the wage bill to consumption ratio. the labor market channel exacerbates the response of consumption and makes it more volatile than output.imply stronger impact on employment and hence on output. The model overestimates the volatilities of labor and of aggregate demand components. and when augmented by TFP shocks (model 4). The simulated statistics are the averages of 10000 simulations with 62 periods each. it does a better job of explaining the relative volatilities.p. The calibrated parameters of Table 2 imply that an 1p.3p.7p. As in Neumeyer and Perri (2005). model 4 (country risk and TFP shocks). increase in the country risk reduces consumption growth by 0.23p. s = 2 and ϕ = . and their standard deviation are set so that the standard deviation of output in the models 2. (see Panel c). I assess the model’s ability to reproduce the second moments of the actual Brazilian business cycles. According to (11). I consider 6 different models: model 1 (only US rate shocks). Table 3 compares the simulated standard deviations with the actual ones. the relative volatilities become more aligned with those in the data. an 1p. the same length of the data sample. the increase in the interest rate has two reinforcing effects on con- sumption growth. Productivity shocks are randomly generated by equation (2). through the indirect effect (see Panel c).23p. Therefore. and model 6 (all three shocks). even tough it still overestimates that of trade balance. When both US rate 15 . I generate the innovations to the world interest rate and to the country risk premium using equations (4) and (5) and the actual HP-filtered data so that these series in the model mimic their counterpart in the data. 4.p. model 2 (US rate and TFP shocks).3 Business Cycle Statistics In this section. through the direct effect and by 0. model 5 (US rate and country risk shocks).p.p. increase in the country risk reduces hours by about 0.5.p. One direct effect that is proportional to the inter-temporal elasticity of substitution 1/σ and one indirect effect that is proportional to employment growth. The calibrated parameters of Table 4 imply that d = −2. model 3 (country risk shocks).p. The model with only country risk shock (model 3) explains a third of the actual volatility of GDP. Notice that by construction models 3 and 4 slightly overestimate the volatility of the interest rate because it ignores the small negative covariance between US rate shocks and country risk shocks. 4 and 6 exactly matches the actual volatility of GDP. Once I turn on the TFP shocks (model 2). The model with only US rate shocks (model 1) is able to generate 28 percent of the actual volatility of GDP and only 42 percent of the interest rate volatility. There- fore.21. especially the volatility of labor.

All models generate correlations with the expected sign but they tend to overestimate their absolute values. and the right correlation structure between interest rate and GDP. this last output downturn was reinforced by other transmission channels that are not considered by the model. especially in its version with country risk shocks. To conclude this section. especially in the last recession. it is fair to say that the simple modified RBC model devel- oped in this paper. and underestimate the cor- relations of output with consumption and with investment. the model generates volatile and counter-cyclical interest rates. Notice that TFP shocks tend to reverse the sign of the correlations between output and trade balance. the models tend to overestimate the correlations of output with interest rate and with labor. Notice that in the data the interest rate leads the cycle by two quarters. the correlation between the actual and simulated GDP is the highest in the model with only country risk shocks (model 3). As I mentioned in Section 1. Table 4 presents the cross-correlations with output for the six models. Figure 5 showed that TFP shocks tend to gener- ate pro-cyclical trade balance thus dampening the counter-cyclical behavior produced by interest rate shocks. whereas in the models it leads the cycle by one quarter because by construction interest rate shocks take only one quarter to affect output in the model. Table 5 reports the cross-correlations with the country interest rate. counter-cyclical trade balance. consumption more volatile than output. As expected. reaching 0. Although the signs of the correlation in most models are about right. Finally. is able to replicate quite well the main business cycles properties of the Brazilian economy. Overall. the right sign for the cross- correlations of output and of interest rates with key macroeconomic indicators. In fact. Figure 7 plots the actual GDP and the simulated GDP using model 3.40. As a matter of fact. The simulated series depicts cyclical fluctuations that are qualitatively similar to those of the actual series. even though their magnitudes are small. These results are very encour- aging compared to the counterfactual predictions of a standard RBC model.and country risk shocks are turned on (model 5). the last line of Table 3 suggests that the model considering all shocks (model 6) still overestimates the relative volatilities of consumption and trade balance. the simulated GDP displays smaller deviations from trend than the actual one. This result suggests that innovations to the country risk premium are more important to explain business cycle volatility than shocks to the world interest rate. It depicts the cross- correlations between output and interest rate for 5 lags and leads in the model that combines TFP shocks and country risk shocks (model 4) and the model with all shocks (model 6). as in the country risk shock model (model 3). Figure 6 complements the information of tables 4 and 5. 16 . the model still explains a third of the output volatility.

as the labor exponent increases (or as the labor supply elasticity decreases). the higher the working capital requirement the higher is the explained volatility of output and the larger is the correlation between output and interest rate. and so does the predicted volatility of output and the absolute value of the correlation between output and interest rate (see equation (10) again). However. The previous experiments provide two important insights regarding the interaction between labor supply elasticity and working capital constraint. model 3 collapses to the standard RBC model. Second.4 Sensitivity Analysis Two crucial parameters for the previous results are the wage elasticity of labor supply s = −1/(1 − ν) and the working capital requirement θ.5. model 3 still successfully explains a large fraction of output fluctuations. The second experiment is the baseline model. The last exercise considers (ν = 3). for a given labor supply elasticity. the response of labor to interest rate shocks decreases. the model with the two baseline parameter values not only delivers counter-cyclical interest rates but also explains about a third of the output fluctuations. 5 Concluding Remarks Fluctuations in the interest rates driven by changes in the country risk premium played an important role in the Brazilian business cycles in the last fifteen years. To perform this exercise. Table 6 reports two key statistics – the volatility of output in the model relative to the actual volatility. if we consider a low but positive value for the working capital parameter such as the one calibrated by Kanczuk (2004). Note that when θ = 0. as mentioned before. which implies a labor supply elasticity of 10. and the correlation between the interest rate and output – for several parameter values. with a labor supply elasticity of 2. the model requires relatively high labor supply elasticity and positive working capital requirement in order to be consistent with the data.1) . which has little hope of explaining the Brazilian Data. as long as firms face some working capital constraint. I perform sensitivity analysis to assess the quantitative implications of these parameter choices. First. The first experiment considers a low labor exponent (ν = 1. In this section. the model with baseline elasticity is still able to explain about a quarter of the GDP volatility. The main goal of this paper was to find out how much of the output volatility in Brazil can be explained by 17 .4. Finally. I use the parsimonious model with only country risk shocks (model 3). Interest rate spikes were associated with output downturns and export booms. For a given working capital parameter. which implies a labor supply elasticity of only 0. On the other hand.

The numerical experiments suggest that we can interpret the Brazilian business cycle properties in recent years as the equilibrium of a model in which payments and receipts of firms are not synchronized and in which labor supply is not significantly affected by income. Given the calibrated parameters. as predicted by standard uncovered interest rate parity conditions. In fact.interest rates fluctuations alone. equipment and technology from abroad. floating exchange rate regimes and accumulation of international reserves both in Brazil and in other emerging market economies have helped to achieve stable and historically low country risk premia in re- cent years. In this model. inflation under control. exchange rate depreciations tend to lower investment spending because domestic firms depend on the imports of machinery. The simple model developed in this paper ignores potentially important fundamentals and transmission channels. The main results suggest that developing countries should design and implement re- forms that reduce their default risk and hence their inherent volatility. The low response of the Brazilian risk premium during the 2008-09 world financial crisis corroborates the increasing importance of those fundamentals. the combination of fiscal discipline. Further improvements in domestic fundamentals. together with a favorable external position. 18 . the interest rate is determined by the international interest rate plus a country risk premium. fluctuations in the country risk are able to account for a third of output fluctuations. are likely to dampen even more the negative effects of external shocks on emerging market economies. Including the exchange rate and other relevant transmission mechanisms in the model is left for future research. I followed Neumeyer and Perri (2005) and developed a model with equilibrium prices and allocations that allows interest rates to have an effect on business cycles. especially the exchange rate. We observe in the data that shocks to the country risk premium are associated with depreciation of the real exchange rate. To achieve this goal. In turn. The model is calibrated such that the relevant parameter values match key empirical moments of the Brazilian economy.

from OECD. from the Fed Saint Louis (FredDatabase). seasonally adjusted. from OECD. • Labor : quarterly average of the index of employed people in urban areas. from Central Bank of Brazil. deflated by the Canadian GDP deflator inflation. • Country Risk : measured by the EMBI Brazil calculated by JP Morgan. deflated by ex-post inflation. Brazilian Data: • GDP. The latter is the average of the GDP deflator inflation in the current period and in the three preceding periods. from Bank of Canada. according to equation (3). and Investment: quarterly real indexes. The US rate is measured by the nominal interest rate on the 3-month treasury bills. contracted at the market interest rates. • Interest Rate: US rate times the country risk. Canadian Data: • National Accounts: quarterly series in current and base-year Canadian Dollars. from the quar- terly National Accounts of IBGE. • Trade Balance/GDP : ratio of nominal net exports to nominal GDP. • Short-term Loans: freely allocated loans of the banking system to non-financial firms. Trade balance-to-GDP ratio is constructed as explained above.A Appendix: Data Description This appendix describes in detail the data used in Section 1 and in the calibration. Consumption. and deflated by inflation as explained above. from the Monthly Employment Survey (PME) of IBGE. • Labor : quarterly average of the employment index. • Interest Rate: nominal interest rate on the 3-month Canadian Treasury Bills. from the Brazilian Institute of Geography and Statistics (IBGE). 19 . The GDP deflator is taken from the Bureau of Economic Analysis (BEA).

Correia. Edwards. Neumeyer.” European Economic Review. 78(3).” Journal of International Economics. D. (1998): “Determinants of Emerging Market Bond Spreads: Do Economic Fun- damentals Matter?” The World Bank Working Paper. 163–185. V. Gopinath (2007): “Emerging Market Business Cycles: The Cycle is the Trend. Schmitt-Grohe. Kleist (1999): “The Evolution and Determinants of Emerging Market Credit Spreads in the 1990s. 1089–1113. and S. E. 61. P. 5(3). S. 115(1). 7. Uribe (2003): “Closing Small Open Economy Models. S. 436–455. Mendoza.Neves. P. M. F. 726–734. (1991): “Real Business Cycles in a Small Open Economy. Hercowitz. Backus. Kydland (1992): “International Real Business Cy- cles. and G. Huffman (1988): “Investment.” The Journal of Political Economy. Kanczuk. and G. and F. 81(4).” Journal of Political Economy. Kehoe. 68. 402– 417. 20 . 797–818.” The American Economic Review. 39. I.” Review of Economics Dynamics. J. Capacity Utilization and the Real Business Cycle. (1984): “LDC Foreign Borrowing and Default Risk: An Empirical Inves- tigation.” Journal of Monetary Economics. Min. and F. 1976-80.. Greenwood. 74(4). Perri (2005): “Business Cycles in Emerging Economies: The Role of Interest Rates. H. 52. and K. 345–380. and M. Rebelo (1995): “Business Cycle in a Small Open Economy. 455–471.” The American Economic Review.” Economia Aplicada. 100(4). Kamin. ——— (2004): “Real Interest Rates and Brazilian Business Cycles. J.. 1899. Z. 745–775.” BIS Working Paper. S.” The American Economic Review..References Aguiar. (2001): “Business Cycle in a Small Open Brazilian Economy.

87 -0. Country risk and TFP shocks 1.40 Trade Balance/GDP 1.86 7.68 -0.08 0. dev.44 0. 2). 1994:IV-2010:I Variable Brazil Canada %σ(X) σ(X)/σ(Y ) ρ(X.64 0.50 Persistence of US rate ρR ∗ 0.00 0.98 0.25 6.02 0.17 1.68 0. US rate and TFP shocks 1. The capital adjustment cost parameter is set to 74 (models 1.84 3. of country risk shock σεD 0.00 -0.13 1.00 1.78 0.53 2.39 -0. 21 .03 2. Y ) ρ(X.0180 Working capital requirement θ 0. US rate shocks 0.53 2.64 3. 4) and 78 (models 5.93 Country Risk and US Rate 5.88 1. dev.53 1.00 0.24 Employment 0.31 The model statistics are averages of 10000 simulations with 62 periods each.13 1.53 2.44 1.15 1.74 0.08 4. R) Output (Y) 1.68 0.93 Persistence of country risk ρD 0.53 1. dev.86 0.33 6.66 No Country Risk 1.33 0.68 0.98 Capital adjustment cost φK varies Risk aversion σ 2.83 3.53 Consumption 1.20 Std.59 1.30 Country Risk 3.44 1.69 0.13 10. Y ) ρ(X.44 2.78 6.68 2.66 -0.44 6.0038 Depreciation rate δ 0.66 0.59 -0.53 1.07 3. Table 1: Brazilian and Canadian Business Cycle Statistics.64 0.00 Bond adjustment cost φB 10−5 Labor weight ψ 2.44 1.76 2.10 0.94 0.95 Capital share α 0.03 0.00 Table 2: Baseline Parameter Values Parameter Symbol Value Parameter Symbol Vale Preferences: Adj.32 0.64 1.90 0.03 7.025 Std.27 0. of technology shock σεz varies Table 3: Actual and Simulated Volatilities Data and Models σ(X)/σ(GDP ) σ(GDP ) σ(R) C Inv Labor TB/GDP Brazilian Data 1.33 3.33 11.79 0.59 5.00 1.22 3.68 0.40 Std.93 2.49 2.16 3. Country risk shocks 0.76 1.51 2. Country risk.84 1.75 0.68 0. 60 (models 3.32 Investment 5. of US rate innovation σεR∗ 0. R) %σ(X) σ(X)/σ(Y ) ρ(X. 6).58 0.04 Interest Rate 2. Cost Parameter: Discount factor β 0. US rate and TFP shocks 1.90 Shock Processes: Labor exponent ν 1.68 0.01 12. Country risk and US rate shocks 0.72 Technology: Persistence of productivity shock ρz 0.

61 0.11 -0.50 1.25 θ = 0.60 0.22 -0.15 0. 60 (models 3.99 Country Risk and US Rate 5.57 0.77 -0. 6).34 0.44 0.15 0.52 -0.1 ν = 1. Country risk.78 -0.32 -0.44 0.73 -0.00 -1.20 (baseline) 0.99 -0.06 The model statistics are averages of 10000 simulations with 62 periods each.61 1.77 -0.39 -0. Country risk and US rate shocks -0. Country risk shocks -0.18 0.20 0.00 -0.08 Country Risk 3. R) σY model ρ(Y.96 -0. US rate shocks -0. 2004) 0. 6).93 -0.14 -0. US rate and TFP shocks -0. The capital adjustment cost parameter is set to 74 (models 1.34 0.73 6.38 0.56 0.00 -0. US rate and TFP shocks -0.17 0.44 -0.99 -0.48 -0.95 -0.36 -0.10 θ = 0.11 (Kanczuk.17 -0.61 The capital adjustment cost parameter is set to 60 in all experiments.68 1. Table 4: Correlations with GDP R C Inv Labor TB/GDP Brazilian Data -0.54 0. Table 5: Correlations with R Y C Inv Labor TB/GDP Brazilian Data -0. The capital adjustment cost parameter is set to 74 (models 1.99 0.41 0.48 -0.24 0.17 No Country Risk 1. 22 . Country risk and US rate shocks -0.03 No Country Risk 1.47 -0.47 0.18 0.17 -0.99 -1.13 0.14 θ = 0.27 0.89 -0.42 4.00 2. Country risk and TFP shocks -0. 4) and 78 (models 5.96 0. 4) and 78 (models 5.99 Country Risk 3.24 -0.20 -1. Country risk shocks -0. US rate and TFP shocks -0.67 0.95 0. 2).5(baseline) ν = 3.20 -0. R) σY model ρ(Y.81 -0. Table 6: Sensitivity Analysis for the Country Risk Model (Model 3) Preferences Working Capital ν = 1. 2). Country risk. R) data data data θ =0 0.13 2.23 0.27 0.15 -0.13 -0.06 0.48 0.17 0. 60 (models 3.00 4.16 0.0 σY σY σY σY model ρ(Y.24 0.10 -0.00 Country Risk and US Rate 5.40 θ = 1.72 The model statistics are averages of 10000 simulations with 62 periods each.06 -0.94 -0. US rate shocks -0.68 0.27 0.31 0.87 0. US rate and TFP shocks -0.27 0. Country risk and TFP shocks -0.35 0.16 6.13 0.14 0.50 0.35 (firm panel data) 0.08 -0.00 2.

1994:IV-2010:I 23 .Figure 1: Real Interest Rates and Output.

Figure 2: Real Interest Rate and Trade Balance. Brazil & Canada 24 . 1994:IV-2010:I Figure 3: Correlation between R(t+j) and GDP(t).

Figure 4: Timing of Decisions 25 .

Figure 5: Impulse Responses 26 .

Figure 6: Correlation between R(t+j) and GDP(t) 27 .

Figure 7: Actual GDP and GDP Simulated by Model 3 (% deviation from trend) 28 .

br 1 Implementing Inflation Targeting in Brazil Jul/2000 Joel Bogdanski. Nakane 29 .br Working Paper Series Working Papers in PDF format can be downloaded from: http://www. Moreira 7 Leading Indicators of Inflation for Brazil Sep/2000 Marcelle Chauvet 8 The Correlation Matrix of the Brazilian Central Bank’s Standard Model Sep/2000 for Interest Rate Market Risk José Alvaro Rodrigues Neto 9 Estimating Exchange Market Pressure and Intervention Activity Nov/2000 Emanuel-Werner Kohlscheen 10 Análise do Financiamento Externo a uma Pequena Economia Mar/2001 Aplicação da Teoria do Prêmio Monetário ao Caso Brasileiro: 1991–1998 Carlos Hamilton Vasconcelos Araújo e Renato Galvão Flôres Júnior 11 A Note on the Efficient Estimation of Inflation in Brazil Mar/2001 Michael F. Cecchetti 12 A Test of Competition in Brazilian Banking Mar/2001 Márcio Bryan and Stephen G. no formato PDF. Albuquerque 5 The Pass-Through from Depreciation to Inflation: a Panel Study Jul/2000 Ilan Goldfajn and Sérgio Ribeiro da Costa Werlang 6 Optimal Interest Rate Rules in Inflation Targeting Frameworks Jul/2000 José Alvaro Rodrigues Neto. Fabio Araújo and Marta Baltar J. Banco Central do Brasil Trabalhos para Discussão Os Trabalhos para Discussão podem ser acessados na no endereço: http://www.bc. Alexandre Antonio Tombini and Sérgio Ribeiro da Costa Werlang 2 Política Monetária e Supervisão do Sistema Financeiro Nacional no Jul/2000 Banco Central do Brasil Eduardo Lundberg Monetary Policy and Banking Supervision Functions on the Central Jul/2000 Bank Eduardo Lundberg 3 Private Sector Participation: a Theoretical Justification of the Brazilian Jul/2000 Position Sérgio Ribeiro da Costa Werlang 4 An Information Theory Approach to the Aggregation of Log-Linear Jul/2000 Models Pedro H.

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Nakane 47 Indicadores Derivados de Agregados Monetários Set/2002 Fernando de Aquino Fonseca Neto e José Albuquerque Júnior 48 Should Government Smooth Exchange Rate Risk? Sep/2002 Ilan Goldfajn and Marcos Antonio Silveira 49 Desenvolvimento do Sistema Financeiro e Crescimento Econômico no Set/2002 Brasil: Evidências de Causalidade Orlando Carneiro de Matos 50 Macroeconomic Coordination and Inflation Targeting in a Two-Country Sep/2002 Model Eui Jung Chang. Gains from Commitment. Marcelo Kfoury Muinhos and Joanílio Rodolpho Teixeira 51 Credit Channel with Sovereign Credit Risk: an Empirical Test Sep/2002 Victorio Yi Tson Chu 52 Generalized Hyperbolic Distributions and Brazilian Data Sep/2002 José Fajardo and Aquiles Farias 53 Inflation Targeting in Brazil: Lessons and Challenges Nov/2002 André Minella. Figueiredo e Thaís Porto Ferreira 60 Delegated Portfolio Management Dec/2002 Paulo Coutinho and Benjamin Miranda Tabak 32 .44 Estrutura Competitiva. Produtividade Industrial e Liberação Comercial Jun/2002 no Brasil Pedro Cavalcanti Ferreira e Osmani Teixeira de Carvalho Guillén 45 Optimal Monetary Policy. and Inflation Aug/2002 Persistence André Minella 46 The Determinants of Bank Interest Spread in Brazil Aug/2002 Tarsila Segalla Afanasieff. Priscilla Maria Villa Lhacer and Márcio I. Paulo Springer de Freitas. Ilan Goldfajn and Marcelo Kfoury Muinhos 54 Stock Returns and Volatility Nov/2002 Benjamin Miranda Tabak and Solange Maria Guerra 55 Componentes de Curto e Longo Prazo das Taxas de Juros no Brasil Nov/2002 Carlos Hamilton Vasconcelos Araújo e Osmani Teixeira de Carvalho de Guillén 56 Causality and Cointegration in Stock Markets: Dec/2002 the Case of Latin America Benjamin Miranda Tabak and Eduardo José Araújo Lima 57 As Leis de Falência: uma Abordagem Econômica Dez/2002 Aloisio Araujo 58 The Random Walk Hypothesis and the Behavior of Foreign Capital Dec/2002 Portfolio Flows: the Brazilian Stock Market Case Benjamin Miranda Tabak 59 Os Preços Administrados e a Inflação no Brasil Dez/2002 Francisco Marcos R.

but Struggling to Promote Growth Ilan Goldfajn. Angelo J. no Currency Jun/2003 Substitution.61 O Uso de Dados de Alta Freqüência na Estimação da Volatilidade e Dez/2002 do Valor em Risco para o Ibovespa João Maurício de Souza Moreira e Eduardo Facó Lemgruber 62 Taxa de Juros e Concentração Bancária no Brasil Fev/2003 Eduardo Kiyoshi Tonooka e Sérgio Mikio Koyama 63 Optimal Monetary Rules: the Case of Brazil Feb/2003 Charles Lima de Almeida. Geraldo da Silva e Souza and Benjamin Miranda Tabak 64 Medium-Size Macroeconomic Model for the Brazilian Economy Feb/2003 Marcelo Kfoury Muinhos and Sergio Afonso Lago Alves 65 On the Information Content of Oil Future Prices Feb/2003 Benjamin Miranda Tabak 66 A Taxa de Juros de Equilíbrio: uma Abordagem Múltipla Fev/2003 Pedro Calhman de Miranda e Marcelo Kfoury Muinhos 67 Avaliação de Métodos de Cálculo de Exigência de Capital para Risco de Fev/2003 Mercado de Carteiras de Ações no Brasil Gustavo S. Nakane 69 r-filters: a Hodrick-Prescott Filter Generalization Feb/2003 Fabio Araújo. Moreira e Ricardo S. Araújo. Guillen 73 Análise de Componentes Principais de Dados Funcionais – uma Maio/2003 Aplicação às Estruturas a Termo de Taxas de Juros Getúlio Borges da Silveira e Octavio Bessada 74 Aplicação do Modelo de Black. Marta Baltar Moreira Areosa and José Alvaro Rodrigues Neto 70 Monetary Policy Surprises and the Brazilian Term Structure of Interest Feb/2003 Rates Benjamin Miranda Tabak 71 On Shadow-Prices of Banks in Real-Time Gross Settlement Systems Apr/2003 Rodrigo Penaloza 72 O Prêmio pela Maturidade na Estrutura a Termo das Taxas de Juros Maio/2003 Brasileiras Ricardo Dias de Oliveira Brito. Carlos Alberto Nunes Cosenza e César das Neves 75 Brazil’s Financial System: Resilience to Shocks. Maia Clemente 68 Real Balances in the Utility Function: Evidence for Brazil Feb/2003 Leonardo Soriano de Alencar and Márcio I. Derman & Toy à Precificação de Opções Maio/2003 Sobre Títulos de Renda Fixa Octavio Manuel Bessada Lion. Mont'Alverne Duarte e Osmani Teixeira de C. João Maurício S. Marco Aurélio Peres. Katherine Hennings and Helio Mori 33 .

Eduardo Facó Lemgruber 79 Inclusão do Decaimento Temporal na Metodologia Out/2003 Delta-Gama para o Cálculo do VaR de Carteiras Compradas em Opções no Brasil Claudio Henrique da Silveira Barbedo. de Oliveira 34 . Nakane 82 Carteiras de Opções: Avaliação de Metodologias de Exigência de Capital Mar/2004 no Mercado Brasileiro Cláudio Henrique da Silveira Barbedo e Gustavo Silva Araújo 83 Does Inflation Targeting Reduce Inflation? An Analysis for the OECD May/2004 Industrial Countries Thomas Y. Ilan Goldfajn and Marcelo Kfoury Muinhos 78 Contornando os Pressupostos de Black & Scholes: Aplicação do Modelo Out/2003 de Precificação de Opções de Duan no Mercado Brasileiro Gustavo Silva Araújo. Ilan Goldfajn and André Minella 77 Inflation Targeting in Brazil: Constructing Credibility under Exchange Jul/2003 Rate Volatility André Minella. Antonio Carlos Figueiredo. Argentina e Estados Unidos Arnildo da Silva Correa e Ronald Otto Hillbrecht 89 O Mercado de Hedge Cambial no Brasil: Reação das Instituições Dez/2004 Financeiras a Intervenções do Banco Central Fernando N. Eduardo Facó Lemgruber 80 Diferenças e Semelhanças entre Países da América Latina: Out/2003 uma Análise de Markov Switching para os Ciclos Econômicos de Brasil e Argentina Arnildo da Silva Correa 81 Bank Competition. 1996-2002 André Soares Loureiro and Fernando de Holanda Barbosa 86 Identificação do Fator Estocástico de Descontos e Algumas Implicações Maio/2004 sobre Testes de Modelos de Consumo Fabio Araujo e João Victor Issler 87 Mercado de Crédito: uma Análise Econométrica dos Volumes de Crédito Dez/2004 Total e Habitacional no Brasil Ana Carla Abrão Costa 88 Ciclos Internacionais de Negócios: uma Análise de Mudança de Regime Dez/2004 Markoviano para Brasil. Wu 84 Speculative Attacks on Debts and Optimum Currency Area: a Welfare May/2004 Analysis Aloisio Araujo and Marcia Leon 85 Risk Premia for Emerging Markets Bonds: Evidence from Brazilian May/2004 Government Debt. Claudio Henrique da Silveira Barbedo. Paulo Springer de Freitas. Agency Costs and the Performance of the Jan/2004 Monetary Policy Leonardo Soriano de Alencar and Márcio I. Gustavo Silva Araújo.76 Inflation Targeting in Emerging Market Economies Jun/2003 Arminio Fraga.

Gustavo Silva Araújo e Eduardo Facó Lemgruber 95 Comment on Market Discipline and Monetary Policy by Carl Walsh Apr/2005 Maurício S. P. Araújo.. Areosa 101 Comparing Equilibrium Real Interest Rates: Different Approaches to Mar/2006 Measure Brazilian Rates Marcelo Kfoury Muinhos and Márcio I. Bugarin and Fábia A. Claudio Henrique da Silveira Barbedo. S. Silva 35 . de Mello 103 The Effect of Adverse Supply Shocks on Monetary Policy and Output Apr/2006 Maria da Glória D. Marcelo Kfoury Muinhos and Jose Ricardo C. Araújo. Gustavo S. João Maurício S.e Eduardo Facó Lemgruber 100 Targets and Inflation Dynamics Oct/2005 Sergio A. Valéria Salomão Garcia. Nakane and Daniela B. Compton and Jose Ricardo da Costa e Silva 98 Capital Flows Cycle: Stylized Facts and Empirical Evidences for Aug/2005 Emerging Market Economies Helio Mori e Marcelo Kfoury Muinhos 99 Adequação das Medidas de Valor em Risco na Formulação da Exigência Set/2005 de Capital para Estratégias de Opções no Mercado Brasileiro Gustavo Silva Araújo. Mirta Bugarin. L. Maia Clemente 94 Simulação Histórica Filtrada: Incorporação da Volatilidade ao Modelo Abr/2005 Histórico de Cálculo de Risco para Ativos Não-Lineares Claudio Henrique da Silveira Barbedo. Sergio Mikio Koyama and Guilherme Cronemberger Parente 92 Steady-State Analysis of an Open Economy General Equilibrium Model Apr/2005 for Brazil Mirta Noemi Sataka Bugarin. Moreira e Ricardo S.90 Bank Privatization and Productivity: Evidence for Brazil Dec/2004 Márcio I. da S. Weintraub 91 Credit Risk Measurement and the Regulation of Bank Capital and Dec/2004 Provision Requirements in Brazil – a Corporate Analysis Ricardo Schechtman. Victor Gomes Silva. Roberto de Goes Ellery Jr. de Carvalho 96 O que É Estratégia: uma Abordagem Multiparadigmática para a Ago/2005 Disciplina Anthero de Moraes Meirelles 97 Finance and the Business Cycle: a Kalman Filter Approach with Markov Aug/2005 Switching Ryan A. Costa and João M. Alves and Waldyr D. Barbedo. Marcelo Kfoury Muinhos 93 Avaliação de Modelos de Cálculo de Exigência de Capital para Risco Abr/2005 Cambial Claudio H. Nakane 102 Judicial Risk and Credit Market Performance: Micro Evidence from Apr/2006 Brazilian Payroll Loans Ana Carla A.

Souto and Benjamin M. Bignotto e Eduardo Augusto de Souza Rodrigues 111 Avaliação de Modelos de Exigência de Capital para Risco de Mercado do Jul/2006 Cupom Cambial Alan Cosme Rodrigues da Silva. Leonardo S. Tabak 116 Out-Of-The-Money Monte Carlo Simulation Option Pricing: the Join Sep/2006 Use of Importance Sampling and Descriptive Sampling Jaqueline Terra Moura Marins. Alencar e Tony Takeda 109 The Recent Brazilian Disinflation Process and Costs Jun/2006 Alexandre A. S. Bankruptcy and Social Welfare Analysis in a Financial Oct/2006 Economy with Risk Regulation Constraint Aloísio P.104 Extração de Informação de Opções Cambiais no Brasil Abr/2006 Eui Jung Chang e Benjamin Miranda Tabak 105 Representing Roommate’s Preferences with Symmetric Utilities Apr/2006 José Alvaro Rodrigues Neto 106 Testing Nonlinearities Between Brazilian Exchange Rates and Inflation May/2006 Volatilities Cristiane R. Tombini and Sergio A. Cajueiro 114 The Inequality Channel of Monetary Transmission Aug/2006 Marta Areosa and Waldyr Areosa 115 Myopic Loss Aversion and House-Money Effect Overseas: an Sep/2006 Experimental Approach José L. Victorio Chu. Marcos R. Vicente 36 . Rodrigues. Alencar and Fabio Kanczuk 108 O Efeito da Consignação em Folha nas Taxas de Juros dos Empréstimos Jun/2006 Pessoais Eduardo A. João Maurício de Souza Moreira e Myrian Beatriz Eiras das Neves 112 Interdependence and Contagion: an Analysis of Information Jul/2006 Transmission in Latin America's Stock Markets Angelo Marsiglia Fasolo 113 Investigação da Memória de Longo Prazo da Taxa de Câmbio no Brasil Ago/2006 Sergio Rubens Stancato de Souza. Eduardo Saliby and Joséte Florencio dos Santos 117 An Analysis of Off-Site Supervision of Banks’ Profitability. B. Albuquerque and Marcelo Portugal 107 Demand for Bank Services and Market Power in Brazilian Banking Jun/2006 Márcio I. Fernandes. Barnhill. Benjamin Miranda Tabak e Daniel O. Nakane. Araújo and José Valentim M. Leonardo S. Tabak 118 Contagion. Juan Ignacio Peña and Benjamin M. Risk and Sep/2006 Capital Adequacy: a Portfolio Simulation Approach Applied to Brazilian Banks Theodore M. Lago Alves 110 Fatores de Risco e o Spread Bancário no Brasil Jul/2006 Fernando G.

Cajueiro 132 Credit Risk Monte Carlo Simulation Using Simplified Creditmetrics’ Mar/2007 Model: the Joint Use of Importance Sampling and Descriptive Sampling Jaqueline Terra Moura Marins and Eduardo Saliby 133 A New Proposal for Collection and Generation of Information on Mar/2007 Financial Institutions’ Risk: the Case of Derivatives Gilneu F. Tabak and Daniel O. A. Tabak 125 Herding Behavior by Equity Foreign Investors on Emerging Markets Dec/2006 Barbara Alemanni and José Renato Haas Ornelas 126 Risk Premium: Insights over the Threshold Dec/2006 José L. Vivan and Benjamin M. Tabak 134 Amostragem Descritiva no Apreçamento de Opções Européias através Abr/2007 de Simulação Monte Carlo: o Efeito da Dimensionalidade e da Probabilidade de Exercício no Ganho de Precisão Eduardo Saliby. Vicente 129 Brazil: Taming Inflation Expectations Jan/2007 Afonso S. Mário Mesquita and André Minella 130 The Role of Banks in the Brazilian Interbank Market: Does Bank Type Jan/2007 Matter? Daniel O. S. Sergio Luiz Medeiros Proença de Gouvêa e Jaqueline Terra Moura Marins 37 . Lima. Bugarin 122 Nonlinear Mechanisms of the Exchange Rate Pass-Through: a Phillips Nov/2006 Curve Model With Threshold for Brazil Arnildo da Silva Correa and André Minella 123 A Neoclassical Analysis of the Brazilian “Lost-Decades” Nov/2006 Flávia Mourão Graminho 124 The Dynamic Relations between Stock Prices and Exchange Rates: Nov/2006 Evidence for Brazil Benjamin M. Fernandes. Augusto Hasman and Juan Ignacio Peña 127 Uma Investigação Baseada em Reamostragem sobre Requerimentos de Dec/2006 Capital para Risco de Crédito no Brasil Ricardo Schechtman 128 Term Structure Movements Implicit in Option Prices Dec/2006 Caio Ibsen R. Almeida and José Valentim M. B. Felipe Luduvice and Benjamin M. A. Benjamin M. Cajueiro and Benjamin M. Tabak 121 The Role of Consumer’s Risk Aversion on Price Rigidity Nov/2006 Sergio A.119 A Central de Risco de Crédito no Brasil: uma Análise de Utilidade de Out/2006 Informação Ricardo Schechtman 120 Forecasting Interest Rates: an Application for Brazil Oct/2006 Eduardo J. Bevilaqua. Lago Alves and Mirta N. Tabak 131 Long-Range Dependence in Exchange Rates: the Case of the European Mar/2007 Monetary System Sergio Rubens Stancato de Souza.

Tabak 139 Selection of Optimal Lag Length inCointegrated VAR Models with Jun/2007 Weak Form of Common Cyclical Features Carlos Enrique Carrasco Gutiérrez. Reinaldo Castro Souza and Osmani Teixeira de Carvalho Guillén 140 Inflation Targeting. José Alberto Rebello Baranowski e Renato da Silva Carvalho 143 Price Rigidity in Brazil: Evidence from CPI Micro Data Sep/2007 Solange Gouvea 144 The Effect of Bid-Ask Prices on Brazilian Options Implied Volatility: a Oct/2007 Case Study of Telemar Call Options Claudio Henrique da Silveira Barbedo and Eduardo Facó Lemgruber 145 The Stability-Concentration Relationship in the Brazilian Banking Oct/2007 System Benjamin Miranda Tabak. Vicente 137 Monetary Policy Design under Competing Models of Inflation May/2007 Persistence Solange Gouvea e Abhijit Sen Gupta 138 Forecasting Exchange Rate Density Using Parametric Models: May/2007 the Case of Brazil Marcos M. Chang and Benjamin M. Takami and Benjamin M. Eui J. André Leite e José Vicente 147 Explaining Bank Failures in Brazil: Micro. Eduardo José Araújo Lima and Eui Jung Chang 146 Movimentos da Estrutura a Termo e Critérios de Minimização do Erro Out/2007 de Previsão em um Modelo Paramétrico Exponencial Caio Almeida.135 Evaluation of Default Risk for the Brazilian Banking Sector May/2007 Marcelo Y. Abe. Credibility and Confidence Crises Aug/2007 Rafael Santos and Aloísio Araújo 141 Forecasting Bonds Yields in the Brazilian Fixed income Market Aug/2007 Jose Vicente and Benjamin M. Solange Maria Guerra. Macro and Contagion Effects Oct/2007 (1994-1998) Adriana Soares Sales and Maria Eduarda Tannuri-Pianto 148 Um Modelo de Fatores Latentes com Variáveis Macroeconômicas para a Out/2007 Curva de Cupom Cambial Felipe Pinheiro. Tabak 142 Crises Análise da Coerência de Medidas de Risco no Mercado Brasileiro Ago/2007 de Ações e Desenvolvimento de uma Metodologia Híbrida para o Expected Shortfall Alan Cosme Rodrigues da Silva. Tabak 136 Identifying Volatility Risk Premium from Fixed Income Asian Options May/2007 Caio Ibsen R. Almeida and José Valentim M. Romeu Gomes. Eduardo Facó Lemgruber. Caio Almeida e José Vicente 149 Joint Validation of Credit Rating PDs under Default Correlation Oct/2007 Ricardo Schechtman 38 .

Carlos Patrício Samanez e Gustavo Santos Raposo 39 . Azevedo 161 Evaluating Value-at-Risk Models via Quantile Regressions Feb/2008 Wagner P. Márcio G. Luiz Renato Lima and Oliver Linton 162 Balance Sheet Effects in Currency Crises: Evidence from Brazil Apr/2008 Marcio M. Tabak 159 Behavior and Effects of Equity Foreign Investors on Emerging Markets Feb/2008 Barbara Alemanni and José Renato Haas Ornelas 160 The Incidence of Reserve Requirements in Brazil: Do Bank Stockholders Feb/2008 Share the Burden? Fábia A. P.150 A Probabilistic Approach for Assessing the Significance of Contextual Oct/2007 Variables in Nonparametric Frontier Models: an Application for Brazilian Banks Roberta Blass Staub and Geraldo da Silva e Souza 151 Building Confidence Intervals with Block Bootstraps for the Variance Nov/2007 Ratio Test of Predictability Eduardo José Araújo Lima and Benjamin Miranda Tabak 152 Demand for Foreign Exchange Derivatives in Brazil: Dec/2007 Hedge or Speculation? Fernando N. Gaglianone. de Oliveira and Walter Novaes 153 Aplicação da Amostragem por Importância Dez/2007 à Simulação de Opções Asiáticas Fora do Dinheiro Jaqueline Terra Moura Marins 154 Identification of Monetary Policy Shocks in the Brazilian Market Dec/2007 for Bank Reserves Adriana Soares Sales and Maria Tannuri-Pianto 155 Does Curvature Enhance Forecasting? Dec/2007 Caio Almeida. Guillen and Benjamin M. Garcia and Walter Novaes 163 Searching for the Natural Rate of Unemployment in a Large Relative May/2008 Price Shocks’ Economy: the Brazilian Case Tito Nícias Teixeira da Silva Filho 164 Foreign Banks’ Entry and Departure: the recent Brazilian experience Jun/2008 (1996-2006) Pedro Fachada 165 Avaliação de Opções de Troca e Opções de Spread Européias e Jul/2008 Americanas Giuliano Carrozza Uzêda Iorio de Souza. Nakane 157 Is the Investment-Uncertainty Link Really Elusive? The Harmful Effects Jan/2008 of Inflation Uncertainty in Brazil Tito Nícias Teixeira da Silva Filho 158 Characterizing the Brazilian Term Structure of Interest Rates Feb/2008 Osmani T. André Leite and José Vicente 156 Escolha do Banco e Demanda por Empréstimos: um Modelo de Decisão Dez/2007 em Duas Etapas Aplicado para o Brasil Sérgio Mikio Koyama e Márcio I. Romeu Gomes. de Carvalho and Cyntia F. Janot.

Páscoa. Myrian Petrassi and Juan Pablo Torres-Martínez 177 Preference for Flexibility and Bayesian Updating Dec/2008 Gil Riella 178 An Econometric Contribution to the Intertemporal Approach of the Dec/2008 Current Account Wagner Piazza Gaglianone and João Victor Issler 179 Are Interest Rate Options Important for the Assessment of Interest Dec/2008 Rate Risk? Caio Almeida and José Vicente 180 A Class of Incomplete and Ambiguity Averse Preferences Dec/2008 Leandro Nascimento and Gil Riella 181 Monetary Channels in Brazil through the Lens of a Semi-Structural Apr/2009 Model André Minella and Nelson F. Eliseu Martins e Luiz João Corrar 170 Política de Fechamento de Bancos com Regulador Não-Benevolente: Jul/2008 Resumo e Aplicação Adriana Soares Sales 171 Modelos para a Utilização das Operações de Redesconto pelos Bancos Ago/2008 com Carteira Comercial no Brasil Sérgio Mikio Koyama e Márcio Issao Nakane 172 Combining Hodrick-Prescott Filtering with a Production Function Aug/2008 Approach to Estimate Output Gap Marta Areosa 173 Exchange Rate Dynamics and the Relationship between the Random Aug/2008 Walk Hypothesis and Official Interventions Eduardo José Araújo Lima and Benjamin Miranda Tabak 174 Foreign Exchange Market Volatility Information: an investigation of Aug/2008 real-dollar exchange rate Frederico Pechir Gomes. Marcelo Yoshio Takami and Vinicius Ratton Brandi 175 Evaluating Asset Pricing Models in a Fama-French Framework Dec/2008 Carlos Enrique Carrasco Gutierrez and Wagner Piazza Gaglianone 176 Fiat Money and the Value of Binding Portfolio Constraints Dec/2008 Mário R. Souza-Sobrinho 40 .166 Testing Hyperinflation Theories Using the Inflation Tax Curve: a case Jul/2008 study Fernando de Holanda Barbosa and Tito Nícias Teixeira da Silva Filho 167 O Poder Discriminante das Operações de Crédito das Instituições Jul/2008 Financeiras Brasileiras Clodoaldo Aparecido Annibal 168 An Integrated Model for Liquidity Management and Short-Term Asset Jul/2008 Allocation in Commercial Banks Wenersamy Ramos de Alcântara 169 Mensuração do Risco Sistêmico no Setor Bancário com Variáveis Jul/2008 Contábeis e Econômicas Lucio Rodrigues Capelletto.

Juan Ignacio Peña and Benjamin Miranda Tabak 185 Market Forecasts in Brazil: performance and determinants Apr/2009 Fabia A.182 Avaliação de Opções Americanas com Barreiras Monitoradas de Forma Abr/2009 Discreta Giuliano Carrozza Uzêda Iorio de Souza e Carlos Patrício Samanez 183 Ganhos da Globalização do Capital Acionário em Crises Cambiais Abr/2009 Marcio Janot e Walter Novaes 184 Behavior Finance and Estimation Risk in Stochastic Portfolio Apr/2009 Optimization José Luiz Barros Fernandes. Benjamin M. Benjamin M. Tabak and Francisco Vazquez 190 Concentração Bancária. Myrian Beatriz Eiras da Neves and Giovani Antonio Silva Brito 188 Pricing Asian Interest Rate Options with a Three-Factor HJM Model Jun/2009 Claudio Henrique da Silveira Barbedo. Jaqueline Terra Moura Marins e Myrian Beatriz Eiras das Neves 194 Testes de Contágio entre Sistemas Bancários – A crise do subprime Set/2009 Benjamin M. Jaqueline Terra Moura Marins. Tabak e Manuela M. Alencar 191 Concentração e Inadimplência nas Carteiras de Empréstimos dos Set/2009 Bancos Brasileiros Patricia L. Tecles. de Carvalho and André Minella 186 Previsão da Curva de Juros: um modelo estatístico com variáveis Maio/2009 macroeconômicas André Luís Leite. Staub 192 Inadimplência do Setor Bancário Brasileiro: uma avaliação de Set/2009 suas medidas Clodoaldo Aparecido Annibal 193 Loss Given Default: um estudo sobre perdas em operações prefixadas no Set/2009 mercado brasileiro Antonio Carlos Magalhães da Silva. Lucratividade e Risco Sistêmico: uma Set/2009 abordagem de contágio indireto Bruno Silva Martins e Leonardo S. Romeu Braz Pereira Gomes Filho e José Valentim Machado Vicente 187 The Influence of Collateral on Capital Requirements in the Brazilian Jun/2009 Financial System: an approach through historical average and logistic regression on probability of default Alan Cosme Rodrigues da Silva. de Souza 195 From Default Rates to Default Matrices: a complete measurement of Oct/2009 Brazilian banks' consumer credit delinquency Ricardo Schechtman 41 . Antônio Carlos Magalhães da Silva. Tabak e Roberta B. José Valentim Machado Vicente and Octávio Manuel Bessada Lion 189 Linking Financial and Macroeconomic Factors to Credit Risk Jul/2009 Indicators of Brazilian Banks Marcos Souto.

Divino and Benjamin M. Margarida Sarmiento Gutierrez. Tabak 198 Impacto dos Swaps Cambiais na Curva de Cupom Cambial: uma análise Nov/2009 segundo a regressão de componentes principais Alessandra Pasqualina Viola. Staub. André Minella e Sabino da Silva Pôrto Júnior 210 Determinants of Bank Efficiency: the case of Brazil May/2010 Patricia Tecles and Benjamin M. Cajueiro. Matsumura and José Valentim Vicente 197 Forecasting the Yield Curve for Brazil Nov/2009 Daniel O. Geraldo Souza and Benjamin M. de Carvalho 205 Model selection. Tabak 42 . Tabak 207 Brazilian Strategy for Managing the Risk of Foreign Exchange Rate Apr/2010 Exposure During a Crisis Antonio Francisco A. André Minella e Sabino da Silva Pôrto Júnior 204 Fiscal and monetary policy interaction: a simulation based analysis Apr/2010 of a two-country New Keynesian DSGE model with heterogeneous households Marcos Valli and Fabia A. estimation and forecasting in VAR models with Apr/2010 short-run and long-run restrictions George Athanasopoulos. Osmani Teixeira de Carvalho Guillén. Arnildo da Silva Correa. Jose A. João Victor Issler and Farshid Vahid 206 Fluctuation Dynamics in US interest rates and the role of monetary Apr/2010 policy Daniel Oliveira Cajueiro and Benjamin M. Jaqueline Terra Moura Marins e Myrian Beatriz Eiras das Neves 209 Produção Industrial no Brasil: uma análise de dados em tempo real Maio/2010 Rafael Tiecher Cusinato. Leon 202 Considerações sobre a Atuação do Banco Central na Crise de 2008 Mar/2010 Mário Mesquita e Mario Torós 203 Hiato do Produto e PIB no Brasil: uma Análise de Dados em Abr/2010 Tempo Real Rafael Tiecher Cusinato. Tabak 201 Efeitos da Globalização na Inflação Brasileira Jan/2010 Rafael Santos e Márcia S. Silva Jr. Octávio Bessada Lion e Cláudio Henrique Barbedo 199 Delegated Portfolio Management and Risk Taking Behavior Dec/2009 José Luiz Barros Fernandes.196 The role of macroeconomic variables in sovereign risk Oct/2009 Marco S. Juan Ignacio Peña and Benjamin Miranda Tabak 200 Evolution of Bank Efficiency in Brazil: A DEA Approach Dec/2009 Roberta B. 208 Correlação de default: uma investigação empírica de créditos de varejo Maio/2010 no Brasil Antonio Carlos Magalhães da Silva.

Laiz and Daniel O. Cajueiro 43 . Fonseca. Chile. Andrade and Emanuel Kohlscheen 212 The Natural Rate of Unemployment in Brazil. González and L. Colombia and Sep/2010 Venezuela: some results and challenges Tito Nícias Teixeira da Silva 213 Estimation of Economic Capital Concerning Operational Risk in a Oct/2010 Brazilian banking industry case Helder Ferreira de Mendonça. Tabak. Pereira da Silva 217 Financial Stability and Monetary Policy – The case of Brazil Oct/2010 Benjamin M. Tabak. F.R.211 Pessimistic Foreign Investors and Turmoil in Emerging Markets: the Aug/2010 case of Brazil in 2002 Sandro C. Fazio and Daniel O. Cajueiro 216 Cyclical Effects of Bank Capital Buffers with Imperfect Credit Markets: Oct/2010 international evidence A. Dimas M. Marcela T. Délio José Cordeiro Galvão and Renato Falci Villela Loures 214 Do Inflation-linked Bonds Contain Information about Future Inflation? Oct/2010 José Valentim Machado Vicente and Osmani Teixeira de Carvalho Guillen 215 The Effects of Loan Portfolio Concentration on Brazilian Banks’ Return Oct/2010 and Risk Benjamin M.