Apresentação Do Powerpoint

Combating Inflation in Brazil: Sacrifice or Gain?

A Calculation of Sacrifice Ratios during Eight Disinflation Periods in Brazil, from 1947.I to 2015.IV

Jolanda E. Ygosse Battisti, Rodolfo Pires, Julia von Maltzan Pacheco FGV-EAESP

Objective of the paper … to calculate sacrifice ratios for policy-induced inflationary and disinflationary periods, using data on the Brazilian economy from 1947 to 2015.

Why do we care? … inflation is costly for society. However, actively combating inflation can also be costly, especially in the short run, resulting in a policy dilemma. Main result … perhaps surprisingly, combating inflation does not necessarily imply a loss of output and jobs in Brazil. Especially when inflation is a fiscal phenomenon, the sacrifice ratio is inverted. This is good news for policy makers 4000 CONTEXT

3750 Consumer Price Index (IPC) 3500 in Brazil, 1912(1)-2015(1) (in log x 100; 1912=0) 3250 Real Plan 3000

2750 IPC (1939=100) IPC 2500 Average annual inflation rate of 2250 54% before the Real Plan, and 2000 6,4% since the Real Plan 1750

1500 in ln, normalized for 1912=0 (x100) 1912=0 fornormalized inln, 1250 1000 750 500 250 0 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 Source: Data from Mitchell (1998); IPEADATA, IPC-FIPE; and author´s calculations. Year

175 Monthly Inflation Rate in Brazil 1912-1980, annualized 150 Crisis of the

in %, annualizedin %, Sixties Monthly Inflation Monthly 125

WWII 100 High inflation was 75 common, since the 1940s … 50

-25 (for comparison, current IT 4,5% p.y.) Deflation -50 (Great Depression USA)

1920 1930 1940 1950 1960 1970 1980 Source: Data from Mitchell (1998); IPEADATA, IPC-FIPE; author´s calculations. Year

Monthly Inflation Monthly 60 Plan 55

50 Collor II 45 Summer 40 Plan 35 Bresser Change, from exchange rate 30 Plan target to inflation target 25 Cruzado 20 Plan 15 10 5 0 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Source: Data from IPEADATA, IPC-FIPE Year

25 Target 1995(1)-2015(1) (p.y.) annualized

20 Monthly Inflation Monthly

(Current IT, of 4,5% (p.y.) -5 ± 2 percentage points (bands indicated in green)

-10

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Source: IPEADATA, IPC-FIPE; authors’ calculations. Year

Revenues in % of GDP, 1861-2015 PublicOs deficitssector fiscais

fiscaldo setor deficitspúblico and Central Government

Spending Spending

GDP The fiscal deficits of of

the 60s, 70s, and 80s

in % % in Government

Central Primary Government Surpluses Revenues 90s and 00s

; authors’ calculations. Year Table 1 – Average Annual Growth Rates per Decade and per Period 1870-2013 (144 years), 1912-2013 (102 years) e 1950-2013 (64 years) Real GDP Real p.cap. Labor Annual Period (Total) Population GDP Productivity Inflation 1870s1 2,42 1,87 0,54 -- -- 1880s 2,42 1,87 0,54 -- -- 1890s 1,16 2,34 – 1,15 -- -- 1900s 3,18 2,16 1,00 -- -- 1910s 3,59 2,12 1,44 -- 7,213 1920s 4,53 2,06 2,42 -- 3,96 1930s 3,12 2,05 1,05 -- 4,45 1940s 5,17 2,34 2,77 -- 15,40 1950s 6,26 3,20 2,96 3,312 20,38 1960s 5,59 2,96 2,56 2,92 44,92 1970s 8,23 2,58 5,51 3,61 30,98 1980s 2,83 2,16 0,66 – 0,37 242,80 1990s 1,67 1,58 0,09 0,68 270,57 2000s 3,20 1,22 1,95 0,83 5,72 2010-2013 3,09 0,89 2,18 0,94 5,284 1870-2013 3,79 2,14 1,61 -- -- 1912-2013 4,38 2,17 2,15 -- 44,075 1950-2013 4,49 2,14 2,29 1,74 70,015 Source: Author´s elaboration, based on data from Bolt e van Zanden (2014), The Conference Board, IPEADATA and FIPE. CONTEXT Crisis 225 Economic 2007-2009

100) Real p.cap. GDP, 1870-2013 Miracle 200

Transformed in ln, vezes 1870=0 (x 100) Financial 175 Trend Crisis 2002 Real per Capita GDP per Capita Real 150 Crise

de Dívida in1870=0, ln, 125 The slope represent Externa (Hiper) the growth rate Inflation Crisis 100 Crisis 60s 75

25 WWII

0 Great Depression Crisis WWI Encilhamento -25 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 Source: Maddison, Bolt & van Zanden (2014), 1870-2010; Year 2011-2013: The Conference Board (2014); author’s calculations Copyright © 2014 Jolanda E. Ygosse Battisti. All rights reserved 20 CONTEXT Business Cycle, p.cap. Real GDP Economic 1870Movimento-2013 da Conjuntura (per Capita)Miracle 15 (Deviationno Brasil from, 1870 Trend)-2013 (Desvio Percentual do PIB Real per Capita da Tendência) Trend 10 Crisis 2007-2009

5 Deviation from Trend, in % in Trend, fromDeviation

-5

Financial -10 Crisis External 2002 Great Debt WWII WWI Depression Crisis -15 (Hiper) Crisis of Crisis Inflation “Encilhamento” 60s Crisis -20 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 2020 Source: Maddison, Bolt & van Zanden (2014), 1870-2010; Year 2011-2013: The Conference Board (2014); author’s calculations. Copyright © 2014 Jolanda E. Ygosse Battisti. All rights reserved Research Questions

1./ Has actively combating inflation resulted in (significant) short term loss of GDP?

2./ Has it had a positive or negative impact on (long term) economic growth?

SOME STYLIZED FACTS Evidence on Phillips Curve

Based on a meta-analysis of the existing literature that estimates the Phillips Curve for Brazil, we cannot conclude unanimously that this trade-off is important for Brazil

Based on analysis of 24 papers – joined work with Larissa Marubayashi

4 papers confirmed the existence of a trade off 3 papers rejected the existence of a trade off The remaining articles did not report a clear position Brazil´s Expectations Augmented Phillips Curve, 2011(1) – 2014(4) (monthly data)

4 inflation

2 expected

0 minues

-2

Taxa de Inflação menos Taxa de Infação Esperada Infação de Taxa menos Inflação de Taxa Effective

-4

EffectiveTaxa de Desempregominus natural menos Taxa unemployment de Desemprego Naturalrate

-6

-6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 Source: Monthly data from BCB and IBGE; author’s estimations.

Evidence on Stagflation

Based on a business cycle analysis for 1980-2015, we find that 8 out of the last 11 recessions can be classified as “stagflation”: inflation high or higher when the economy enters in recession compared to before and after the recession joined work with Rafaella Baraldo Evidence on Okun’s Law

8 Okun’s Law for Brazil, 1991 – 2013:

ΔY/Y = 2,9 – 1,4 Δu 2010 Y/Y

7 Δ

6 1994 2004

(in % year) % per (in 2007 Average Annual 5 2008 Growth Rate of 1993 1995 Potential GDP

4 2000 1997 Real GDP’s Growth Rate, Growth GDP’s Real 2006 2005

3 2002 2011 1996

2 2013 2001 1 2003 2012 1999 1998

0 1992 2009

-1.50-1 -1.25 -1.00 -0.75 -0.50 -0.25 0.00 0.25 0.50 0.75 1.00 1.25 1.50 Source: Author’s elaboration, based on data of Bolt & van Change in unemployment rate, Δu Zanden (2014), The Conference Board and ILO (in %-pts) Copyright © 2015 Jolanda E. Ygosse Battisti. All rights reserved Evidence on a Negative Impact of Procyclical Fiscal Policy on Long Term Growth

Based on a panel data study of upper middle income countries, for 1980-2015, we find that procyclical fiscal policy, measured as increase of structural primary surplus during recessions and decrease during booms, affects negatively long term economic growth

Work in progress (with Mariana Meneghini) Cyclical behavior of Government Spending

P T P T P T P T P

Government Spending Cycle

GDP Cycle

Time Source: IBGE and own calculations; Recessions dated by CODACE (2015), of FGV-IBRE. P: Peak; T: Trough. Structural Primary Surplus and Recessions

3.5 P T P T P T P T P

3.0

Surplus GDP)

2.5

Primary

potential of

2.0

Structural % (in 1.5

1.0

0.5

0.0

-0.5

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Tempo Source: Ygosse-Battisti (2015), with data from Tesouro Nacional; CODACE (2015), of FGV-IBRE. P: Peak; T: Trough. Stylized facts

So the Phillips curve is vertical or even positively sloped in the short run

GDP cycle and inflation are not significantly correlated

Most recessions are inflationary

Okun´s Law for Brazil shows that unemployment is less sensitive for diminishing growth compared to, for example, the US

And procyclical fiscal policy hurts long-run economic growth

This leads us to believe that combating inflation may have short and long term benefits Research Method

We calculate sacrifice ratios for Brazil We follow Ball (1994) and the vast literature that applies Ball’s method

However, we do some things different:

- Ball assumes a priori a negative relationship between the output gap and disinflation. We do not.

- Ball uses technical analysis for the determination of disinflation periods. We use both technical and historical-descriptive analysis

- Ball only considers disinflation episodes with initial (peak) inflation below 25%. This would leave us with only 2 episode for Brazil, greatly underreporting disinflation periods in the country

- Ball uses an ad hoc method for calculating the output gap. We use commonly used methods Sacrifice Ratio - Definition

The so-called Sacrifice Ratio can be used to measure, ex post, how costly it has been for a country to combat inflation during a given disinflation period.

This ratio measures the costs of disinflationary policies in terms of how much the country´s GDP fell below its potential GDP during the disinflation period.

The Sacrifice Ratio (SR) is a ratio of the acumulated output gap during a disinflation period, with the percentage-point drop of trend-inflation rate that was achieved during this same period. To facilitate comparison of the sacrifice ratio of different disinflation periods, this number is divided by the duration of the disinflation period (i.e., the number of quarters of disinflation) and multiplied by 4, to get an annual estimate.

This definition of the sacrifice ratio was first proposed by Laurence Ball, in his 1993 paper, entitled “What determines the sacrifice ratio?”.

풀 −풀 풕 푷,풕 풀 ퟒ SR = 푷,풕 x 흅퐩퐞퐚퐤−흅퐭퐫퐨퐮퐠퐡 퐍퐨.퐐퐮퐚퐫퐭퐞퐫퐬

Yt real GDP, at quarter t YP,t real potential GDP, at quarter t πt trend-inflation, 9-quarters moving average at quarter t (moving average of the quarterly inflation rate of the 4 quarters before t, at t, and the 4 quarters after t)

Laurence Ball suggests to determine the trend of inflation, using a 9 Quarter Moving Average (9Q-MA) of quarterly inflation data. By doing so, we really get a medium term inflation-trend, and we filter out any short term fluctuations of the inflation rate.

Next, Ball calculates disinflation periods the following way:  A trend-inflation peak is observed if both the four quarters before as well as the four quarters after a turning point the 9Q-MA inflation rate is lower than at the turning point.  A trend-inflation trough is observed if both the four quarters before as well as the four quarters after a turning point the 9Q-MA inflation rate is higher than at the turning point.  If the drop in inflation, from the trend-inflation peak to the trend-inflation trough is 2%-pts or more, the period from peak to trough is considered a disinflation period.

We do so using monthly IPC-FIPE inflation data, taken from IPEADATA, for the period 1946(1)-2015(10) and transform this data into quarterly inflation rates.

Next, we annualize the quarterly inflation rates and use this data to calculate the 9Q-MA-series, that is, the trend-inflation observations.

Based on this data, we identify 8 disinflation periods and 3 mini-disinflation periods from 1946.I to 2015.IV.

How to Determine the GDP-Gap

In the calculations presented next, we use the Hodrick- Prescott filter. This filter gives us a smoothed nonlinear trend of quarterly GDP, which is widely accepted as a proxy for potential GDP. We calculate the percentage deviation of actual GDP from potential GDP.

Data: quarterly real GDP data from IBGE for the period 1980.I-2015.II and estimates from Bonelli & Fontoura- Rodrigues (2010) for the period 1947.I-1979.IV.

Copyright © 2015 Jolanda E. Ygosse Battisti. All rights reserved inflation (in %) Trend Inflation in Brazil, 1946.I – 1958.IV peak 35 Disinflation Period 1 Disinflation Period 2 Disinflation Period 3 1946.I – 1949.IV 1952.I – 1954.II 1956.I – 1957.II (drop 31 %-pts) (drop 10 %-pts) (drop 5,5 %-pts) 30 peak

peak 25

15 trough trough

trough

1958(4) 1946(1) 1946(2) 1946(3) 1946(4) 1947(1) 1947(2) 1947(3) 1947(4) 1948(1) 1948(2) 1948(3) 1948(4) 1949(1) 1949(2) 1949(3) 1949(4) 1950(1) 1950(2) 1950(3) 1950(4) 1951(1) 1951(2) 1951(3) 1951(4) 1952(1) 1952(2) 1952(3) 1952(4) 1953(1) 1953(2) 1953(3) 1953(4) 1954(1) 1954(2) 1954(3) 1954(4) 1955(1) 1955(2) 1955(3) 1955(4) 1956(1) 1956(2) 1956(3) 1956(4) 1957(1) 1957(2) 1957(3) 1957(4) 1958(1) 1958(2) 1958(3)

Sources: IPEADATA (IPC-FIPE) and own calculations time

Copyright © 2015 Jolanda E. Ygosse Battisti. All rights reserved inflation (in %) Trend Inflation in Brazil, 1957.I - 1986.I Disinflation Period 5 1985.I – 1985.IV 250 (drop 43 %-pts) Disinflation Period 4 peak 1964.I – 1972.IV (drop 67 %-pts) 200

150 trough

peak 100

0 trough

time Sources: IPEADATA (IPC-FIPE) and own calculations

Copyright © 2015 Jolanda E. Ygosse Battisti. All rights reserved inflation (in %) Trend Inflation Brazil, 1985.III - 1998.IV 12000 peak Disinflation Period 6 1989.I – 1991.II Disinflation Period 7a (drop 9970 %-pts) Real Plan

10000 1993.I – 1995.III (drop 3320 %-pts)

8000

6000

peak 4000

2000

trough

1987(4) 1990(3) 1994(4) 1985(4) 1986(1) 1986(2) 1986(3) 1986(4) 1987(1) 1987(2) 1987(3) 1988(1) 1988(2) 1988(3) 1988(4) 1989(1) 1989(2) 1989(3) 1989(4) 1990(1) 1990(2) 1990(4) 1991(1) 1991(2) 1991(3) 1991(4) 1992(1) 1992(2) 1992(3) 1992(4) 1993(1) 1993(2) 1993(3) 1993(4) 1994(1) 1994(2) 1994(3) 1995(1) 1995(2) 1995(3) 1995(4) 1996(1) 1996(2) 1996(3) 1996(4) 1997(1) 1997(2) 1997(3) 1997(4) 1998(1) 1998(2) 1998(3) 1998(4) 1985(3) trough Sources: IPEADATA (IPC-FIPE) and own calculations time Copyright © 2015 Jolanda E. Ygosse Battisti. All rights reserved inflation (in %) Trend Inflation in Brazil, 1995.III - 2015.IV

25 Continued Disinflation Period (7b) Disinflation Period 8 Real Plan 2002.I – 2006.III 1995.III – 1998.III (drop 6,6 %-pts) 20 (a further drop Mini Mini Mini of 21,4 %-pts) Disinflation 1 Disinflation 2 Disinflation 3 (drop 1,7 %-pts) (drop 1,1 %-pts) (drop 1,5 %-pts)

Start

15 Inflation Targeting Regime peak

10 peak peak peak

5 trough trough trough trough 0 trough

Sources: IPEADATA (IPC-FIPE) and own calculations. Note: the solid green line indicates the inflation target; the dotted black lines indicate the upper and lower bands. time Copyright © 2015 Jolanda E. Ygosse Battisti. All rights reserved Disinflation Periods in Brazil, 1946.I – 2015.IV

Disinflation Period Number of Initial Inflation (at Drop of Inflation Quarters Inflation Peak) (in %-pts) 1946.I - 1948.IV 15 31,74 30,73 1952.I - 1954.II 9 26,71 10,11 1956.I - 1957.II 5 23,02 5,49 1964.I - 1972.IV 35 82,97 67,34 1985.I - 1985.IV 3 202,04 43,14 1989.I - 1991.II 9 10.597,54 9.967,81 1993.II - 1995.III 9 3.342,24 3.318,92 1995.III - 1998.III 11 23,31 21,36 2000.III - 2001.II 3 7,20 1,68 2002.I - 2006.III 18 9,91 6,64 2007.IV – 2009.III 7 5,56 1,10 2011.IV – 2012.III 3 5,95 1,49

Sources: IPEADATA (IPC-FIPE); IBGE (GDP); Bonelli & Fontoura Rodrigues (2010) and own calculations

Copyright © 2015 Jolanda E. Ygosse Battisti. All rights reserved Sacrifice Ratios during Eight Disinflation Periods in Brazil, 1946.I – 2015.IV Number Drop of Accumulated Output Sacrifice Disinflation Period of Quarters Inflation GAP in % of Potential GDP Ratio (+ gain; - loss) (+ sacrifice; - gain) 1946.I - 1948.IV 15 - 30,73 2,85 - 0,0337 gain 1952.I - 1954.II 9 - 10,11 - 0,76 0,0332 sacrifice 1956.I - 1957.II 5 - 5,49 - 15,98 2,3285 sacrifice 1964.I - 1972.IV 35 - 67,34 - 34,20 0,0580 sacrifice 1985.I - 1985.IV 3 - 43,14 - 1,84 0,0568 sacrifice 1989.I - 1991.II 9 - 9.967,81 3,81 - 0,0002 gain 1993.II - 1995.III 9 - 3.318,92 4,63 - 0,0006 gain 1995.III - 1998.III 11 - 21,36 12,84 - 0,2185 gain 1993.II - 1998.III 20 - 3.340,29 17,50 - 0,0052 gain 2000.III - 2001.II 3 - 1,68 4,33 - 3,4376 gain 2002.I - 2006.III 18 - 6,64 - 11,57 0,3871 sacrifice 2007.IV – 2009.III 7 - 1,10 - 2,12 1,1032 sacrifice 2011.IV – 2012.III 3 - 1,49 0,55 - 0,4954 gain Sources: IPEADATA (IPC-FIPE); IBGE (GDP); Bonelli & Fontoura Rodrigues (2010) and own calculations Copyright © 2015 Jolanda E. Ygosse Battisti. All rights reserved Determination of Output Gap (as % of Potential GDP)

Copyright © 2015 Jolanda E. Ygosse Battisti. All rights reserved Real GDP Cycles (Percentage Deviation of Potential GDP) and Recessions Percentage 8 Deviation 7 of Actual GDP 6 from 5 Potential 4 GDP 3 2 1 0 -1 -2 -3 -4 -5 -6 -7 -8 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Sources: Bonelli & Fontoura Rodrigues (2010): 1947.I-1979.IV; IBGE: 1980.I-2015.II; and own calculations. time Note: I used CODACE´s and own calculations for the dating of the recessions.

Copyright © 2015 Jolanda E. Ygosse Battisti. All rights reserved Real GDP Cycles (Percentage Deviation of Potential GDP) and Disinflation Periods Real Plan Percentage 8 1 2 3 4 5 6 7a 7b i 8 ii iii Deviation 7 of Actual GDP 6 from 5 Potential 4 GDP 3 2 1 0 -1 -2 -3 -4 -5 -6 -7 -8 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Sources: Bonelli & Fontoura Rodrigues (2010): 1947.I-1979.IV; time IBGE: 1980.I-2015.II; and own calculations

periods with Recovery and Boom Real Plan Percentage 8 1 2 3 4 5 6 7a 7b i 8 ii iii Deviation 7 of Actual GDP 6 from 5 Potential 4 GDP 3 2 1 0 -1 -2 -3 -4 -5 -6 -7 -8 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 Sources: Bonelli & Fontoura Rodrigues (2010): 1947.I-1979.IV; time IBGE: 1980.I-2015.II; and own calculations. Note: I used CODACE´s and own calculations for the dating of the recessions.

As we could see from the results, getting inflation under control has been beneficiary for Brazil during 3 disinflation periods: right after the Second World War, from 1946 to 1949, end 1980s early 1990s, with the episode of hiperinflation and during the implementation of the Real Plan.

Since the start of the inflation targeting regime (1999), the first mini-disinflation period also coincided with GDP gains. However, the disinflation episode from 2002 to 2006 was acompanied by a sacrifice of GDP, compared to potential GDP.

Trend Growth 9 Quarter Moving Average, Annualized Rates 16 1 2 3 4 5 6 7a 7b i 8 ii iii 14

1959(3) 1992(1) 1949(3) 1950(4) 1952(1) 1953(2) 1954(3) 1955(4) 1957(1) 1958(2) 1960(4) 1962(1) 1963(2) 1964(3) 1965(4) 1967(1) 1968(2) 1969(3) 1970(4) 1972(1) 1973(2) 1974(3) 1975(4) 1977(1) 1978(2) 1979(3) 1980(4) 1982(1) 1983(2) 1984(3) 1985(4) 1987(1) 1988(2) 1989(3) 1990(4) 1993(2) 1994(3) 1995(4) 1997(1) 1998(2) 1999(3) 2000(4) 2002(1) 2003(2) 2004(3) 2005(4) 2007(1) 2008(2) 2009(3) 2010(4) 2012(1) 2013(2) -2 1948(2)

-4

-6

Trend Growth 9 Quarter Moving Average, Annualized Rates 16 1 2 3 4 5 6 7a 7b i 8 ii iii 14

-4

-6

0 0 1 2 3 4 5 6 7 8 9 10

-2

-4

-6

We show that combating inflation is not necessarily costly, as measured by the sacrifice ratio.

On the contrary, we find for several disinflation periods gains, rather than losses, and for inflationary periods losses, rather than gains.

Especially inflationary periods linked to fiscal imbalances result in inverse sacrifice ratios. 80 75 Monthly inflation Collor I (Hiper)inflation inp.m. % 70 1980-2015 (p.m.) crisis of the 80s and 90 65 Real

Monthly Inflation Monthly 60 Plan 55

Source: Data from IPEADATA, IPC-FIPE Year

Ball, Laurence (1993). What determines the sacrifice ratio? NBER Working Paper No. 4306.

Bonelli, Regis & Fontoura Rodrigues (2010). PIB Trimestral: Proposta Metodológica e Resultados para o Período 1947-79. FGV-IBRE, Texto para Discussão No.3

-4

-6

Copyright © 2015 Jolanda E. Ygosse Battisti. All rights reserved Inflação (em %) Tendência da Inflação no Brasil, 1995.III - 2015.IV 25 Período de Desinflação Período de Desinflação Plano Real 2002.I – 2006.III 1995.III – 1998.III (queda 6,6 pts-%) 20 Mini Mini Mini Desinflação Desinflação Desinflaçao (queda 1,7 pts-%) (queda 1,1 pts-%) (queda 1,5 pts-%)

Início 15 Regime de Meta de Inflação pico

10 pico pico pico

5 vale vale vale vale 0 vale

tempo Inflação (em %) Tendência da Inflação no Brasil, 1995.III - 2015.IV 25 Período de Desinflação Período de Desinflação Plano Real 2002.I – 2006.III 1995.III – 1998.III (queda 6,6 pts-%) 20 Mini Mini Mini Desinflação Desinflação Desinflaçao (queda 1,7 pts-%) (queda 1,1 pts-%) (queda 1,5 pts-%)

Início 15 Regime de Meta de Inflação pico

10 pico pico pico

5 vale vale vale vale 0 vale

tempo