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 Copyright © 2016 Jolanda E. Ygosse Battisti. All rights reserved Introduction 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) 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 in ln, 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 Copyright © 2014 Jolanda E. Ygosse Battisti. All rights reserved 200 CONTEXT 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 0 -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 Copyright © 2015 Jolanda E. Ygosse Battisti. All rights reserved 80 CONTEXT 75 Monthly inflation Collor I (Hiper)inflation in % p.m. 70 1980-2015 (p.m.) crisis of the 80s and 90 65 Real 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 Copyright © 2014 Jolanda E. Ygosse Battisti. All rights reserved 30 CONTEXT Exchange Inflation Inflation rate in Brazil Rate Target since the Real Plan 25 Target 1995(1)-2015(1) (p.y.) annualized 20 Monthly Inflation Monthly 15 10 5 0 (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 Copyright © 2014 Jolanda E. Ygosse Battisti. All rights reserved CONTEXT General Government Spending Government and Revenues in Brazil, Spending 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 50 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 0 -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) 6 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. Copyright © 2015 Jolanda E. Ygosse Battisti. All rights reserved 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.