Sérgio Werlang talks about inflation targeting regime and Brazil’s economic challenges in podcast
Sérgio Werlang, a professor of economics at FGV, is this week’s guest on the Art of Economic Policy podcast, hosted by the Institute for Economic Policy Studies / Casa das Garças (IEPE/CdG). Werlang, a former Brazilian Central Bank director who was responsible for implementing Brazil’s inflation targeting regime, will discuss this process, which changed Brazil’s monetary policy in 1999.
The implementation of the inflation targeting system in Brazil resulted in measures such as increased transparency, Monetary Policy Committee meeting minutes, inflation reports and expectations surveys. In this podcast, Werlang explains that the objective was to develop a system similar to that already in place in countries such as New Zealand and England. These countries previously experienced exchange rate problems, like Brazil. In this way, the Brazilian Central Bank would stop trying to control the exchange rate and would instead target inflation through interest rates.
“The implementation of the targeting regime required a transformation of the Central Bank in terms of its vision, attitudes, methods and instruments. The first challenge was to convince the bank’s technicians of the effectiveness of the new targeting regime, given the monetarist tradition of controlling monetary aggregates. Another factor, little mentioned but also of great concern, was the inexistence of IMF programs that monitored inflation targeting regimes. And there was also the exchange rate problem, which would hinder inflation model forecasts, since the exit from the fixed exchange rate regime was accompanied by overshooting,” highlights the economics professor.
To make the new system viable, the creation of the Central Bank’s Department of Studies and Research was fundamental. The department brought together a group of researchers with all the expertise necessary to support the targeting regime and the development of new tools for communicating with the markets. The new regime ended up benefiting from international experience, such as that gained in New Zealand (1989), Chile (1991), England (1992) and Sweden (1993), which showed that its adoption was possible even in emerging countries such as Brazil.
During the podcast, Werlang also stresses that communication was vital for the new regime. According to him, to understand the targeting system, it is necessary to understand the importance of coordinating expectations. In this context, communication has played a central role in the new regime since its inception, as hesitation would create high macroeconomic costs and it was necessary to talk with the markets to convince them about the new system.
“The release of Monetary Policy Committee meeting minutes was a major step in the communication process. Another important factor for the acceptance of the plan was the bank’s intense information program, based on numerous presentations by the president and directors to the markets, journalists and society in general,” he adds.
In the podcast, the professor also addresses future challenges for the targeting regime. Werlang explains that the Central Bank hopes to achieve better alignment between the targeting regime and the country’s macroeconomic reality, since it is not enough to replicate the rates expected in neighboring countries such as Chile, which have different fiscal situations. Another recommended change is greater Central Bank transparency, in terms of both the disclosure of votes and models.
“The evolution of Brazil’s targeting regime is linked to realistic inflation targets, transparency regarding votes and disclosure of the models used by the Central Bank,” he says.
At the end of the episode, the professor reiterates that despite new theories and ways of thinking about macroeconomics, Keynesian principles must be respected, because even though traditional neo-Keynesian macroeconomic models are subject to inaccuracies and limitations, they are still the most reliable.
The complete podcast featuring Professor Sérgio Werlang is available here.