Inflation Targeting in an Open Financially Integrated Emerging Economy: the case of Brazil

This paper conducts a study of the pass-through from the exchange rate devaluation to inflation considering the recent change in the foreign exchange regime in Brazil. Econometric estimations were performed using the specifications of the pass-through suggested by Goldfajn and Werlang (2000). Some simulations of the augmented Taylor rule (with an added exchange rate term) have also been made to analyze the response from supply and external shocks in a simple Inflation Targeting model with trade balance equations. In contrast to Ball (2000), when the exchange rate is included in the Taylor rule, output volatility increases after a negative shock to the capital inflow.