Monetary and Fiscal Policy during Real Plan in Brazil:
An Estimation of a Reaction Function
for the Central Bank and Central Government
Suminori Tokunaga (University of Tsukuba)model for the Brazilian economy (1994Q4‑

１．Introduction

2000Q2) with 31 endogenous variables. The

The Brazilian economy was rapidly

aggregate demand is given by individuallychanges such as exchange rate regime and aestimated equations for aggregate consump-

new framework for monetary policy from thetion, aggregate investment, exports of goods

past structure of the hyperinflation period andand services, while aggregate supply is deter-

had a low growth rate in the 1990s. It is impor-mined by a production function for non-tant to have a systematic view of the national

primary sector. The aggregate demand andeconomy as a whole, and to analyze to theaggregate supply will be adjusted by capacity

monetary and fiscal policy with the reaction

utilization. The main differences comparedfunctions, and analyze the mechanisms bothwith the previous model［Tokunaga (2001),

brake and accelerator. Thus we first present a

Gamma model in IPEA (1998)］are as follows:

prototype quarterly econometric model for the(1) the revision of estimation period to recent

Brazilian economy, and secondly conduct tofive years (from the PLANO REAL to recent

estimate of the Reaction Function for the Cen-

year, 1994Q4‑2000Q2). The period of data fortral Bank and Central Government.

data base is from 1994Q1 to 2000Q2 because of

The structure of this paper is as follows. In

lags for some estimated equation. (2) GDP issection 2, we sketch the structure and briefly

divided by primary sector and non-primary

report the results of estimation the M odel in-

sector. (3) The consumerʼs price index, IPCA,

cluding of reaction function. Section 3 reports

was endogenous explained in price sector. (4)the results of final test of this M odel. Section

We changed the real wage rate to AWR and4 shows the results of simulation analysis forthe unemployment rate to DESA,and estimate

monetary and fiscal policy. Finally we con-two variables in order to determine in labor

clude this paper in section 5.

market endogenously. (5) The foreign direct
investment (FDI$)and foreign portfolio investment (FPF$) in capital account balance were２．Structure of the Modelestimated. Furthermore, the balance of payment variables such as current balance,

We construct a quarterly econometricbalance-of-payment, the foreign currency⎜ 127 ⎜

reserve are endogenously explained likestock is determined by definition and the rate

Gamma model. (6) The reaction function sec-of capacity utilization (NUCI) is estimated by

tor including nominal interest rate (SELIC),

GDE,GDP for non-primary sector,SELIC,and

money supply (M 2), necessity of financial sec-

FDI. In income sector,we define the disposable

tor (NFSNO) is endogenously explained inincome (YD) by definition equation (14).

order to analyze of the monetary and fiscal

The labor sector consists of a real wage
rate (AWR), employment (EM P) and un-

policy.
The estimated results of this model are as

employment rate (DESA). A real wage rate isfollows. The model contains sixteen behavior-

determined by an eclectic-type equation ofal equations and fifteen identities (see Appen-

equation (17).

dix A and B). The number of endogenous

In price sector, a general price index

variables is 31. We are estimated by OLS(IGPDI) is determined by the exchange rate,estimations because we do not contain any

money supply, the real wage rate, the growthcurrent endogenous variables in the explaining

rate of GDE and the capital stock per employ-variables. The sample period for estimation is

ment.

from 1994 Q4 to 2000Q2 in order to analyze theThe balance of payment sector definesmonetary and fiscal policy during Real Plan

trade balance (TB$), current account balance

which introduced on July 1 , 1994.

(CA$), capital account balance (CAP$), bal-This model consists of seven sectors: (A)ance of payment (BP$), and foreign reserve

final demand sector, (B) supply and capital(RES$).

stock sector, (C) income sector, (D) labor

direct (FDI$) and portfolio (FPF$) are esti-

sector, (E) price sector, and (F) balance ofmated.

payments sector, and (G) reaction function

The foreign investments for bothIn reaction function sector, three variables(SELIC, M 2, NFSNO) that are the monetary

sector in flowchart of Figure A1.
The final demand sector is consisting ofprivate consumption (CP), government con-and fiscal instrument were treated as endogenous.

sumption (CG), investment for construction(INVC), investment for machinery and equip-

2．1 Final Demand Sector

ment (INVM ),exports (X),and Imports (IM ).

First,we estimated the final demand sector.

GDE is defined by each components of aggre-

The final demand is given by individuallygate demand. Due to lack of data, we cannot

estimated equation for private consumption,

estimate the investment for inventories.

aggregate investment for machinery and con-

While the aggregate supply sector is consis-

struction, exports and imports. The govern-ting of GDP for primary sector (Y1) and GDP

ment consumption and net non-factor services

for non-primary sector (Y23)that specifies the(SERNF$) are as exogenous variables in thisproduction function.

sector.

The domestic capital⎜ 128 ⎜

In equation (1), the real private consump-expected, the real exchange rate exerts ation expenditure per economic active popula-strong positive effect on export. While import,tion (CP/PTO) is estimated as a function ofwhich is normalized by lagged GDP, depends

real disposable income per economic active

positively on the growth rate of GDE, lagged

population (YD/PTO), nominal interest rate

foreign currency holding ratio (RES$/KR)and(SELIC),real wide money supply (M 2/IPCA),

the lagged value of M /KR as expected, butnecessity of financial sector (NFSNO),

negatively on real interest rate and real

nominal exchange rate (RATE)and time trend

exchange rate in equation (6). The exchange(＠TREND).

rate shows a negative effect as expected.

The real total private investment expendi-

Import in 1995‑1998 has a steady increasing

ture (INV) is divided by for machinery andtrend, but stagnates after the devaluation inconstruction.

1999.

We estimate the real private

investment expenditure for machinery and

The government consumption and net non-equipment (INVM )over capital stock (KR)of

factor services are treated as exogenous vari-equation (2)as a function of the growth rate ofables in this model. Finally,in this sector real

GDP for non-primary sector (Y23), interest

GDE is determined by summing-up theserate,capacity utilization rate (NUCI),accumu-

expenditure items.

lation of FDI (SFDIR), imports ration (IM /GDE), rate of unemployment (DESA) and its

2．2 Supply and Capital Stock Sector

own lagged value. The positive influence ofNext, we estimate the aggregate supply

capacity utilization rate implies the laggedside. The real GDP is divided by for primaryeffect of demand growth.

Furthermore we

sector and non-primary sector. The production

estimate the real private investment expendi-

function for GDP of non-primary sector (Y23)ture for construction (INVC) over capitalper employment (EM P)is mainly estimated bystock of equation (3) as a function of thethe real capital stock (KR) multiplied by thegrowth rate of GDP, interest rate, capacity

capacity utilization rate per employment

utilization rate and its own lagged value. The(EMP)as Cobb-Douglas-type function in equa-

total investment of equation (4) showed ation (9 ). This equation also includes in money

increasing trend in 1996‑98,but it still stagnat-

supply ratio and accumulated FDI ratio. The

ed at low level after the devaluation.

domestic capital stock is calculated according

In equation (5), export (X) which is nor-

to definition in equation (12). In equation (13),malized by lagged GDP, depends positively on

the capacity utilization rate index (NUCI)

the growth rate of the U.S.GDP,lagged capac-

which has a cyclical tendency during 1994‑2000

ity utilization rate, GDP for primary sector

except a big devaluation in 1999,is determinedratio (Y1/GDP), real exchange rate (RATE/

based on the growth rate of the GDE, GDP of

IGPDI) and the lagged value of X/KR. As

non-primary sector over employment, the real

⎜ 129 ⎜

interest rate, the growth rate of FDI and its

function of the growth rate of nominal

own lagged value. It is mainly determined byexchange rate (RATE),the real exchange rate

both aggregate demand and aggregate supply.

(RATE/IGPDI), wide money supply (M2),import price index (PIM ), nominal interest

2．
3 Income Sector

rate (SELIC), necessity of financial sector

The disposable income (YD) is defined by(NFSNO) and the time trend.

the nominal GDP as equation (14).
2．6 Balance of Payment Sector
2．
4 Labor Sector

Finally, the balance of payment sector

Next, we estimate the unemployment rate

defines trade balance (TB$), current accountfunction (DESA) of equation (15). The un-balance (CA$), capital account balance

employment rate is influenced positively by(CAP$), balance of payment (BP$), and for-

GDE per employment (GDE/EMP)and capitaleign reserve (RES$). We estimate the foreign

intensity of labor (KR/EMP), and negatively

direct investments (FDI$)ofequation (22)as a

by the capacity utilization rate. The employ-function of GDE,the U.S.GDP,the growth rate

ment (EM P)is defined by the multiplication ofof the nominal exchange rate (RATE) and its

economically active population (PTO) withown lagged value, and the foreign portfolio(1‑DESA) in equation (16).

investments (FPF$)of equation (23)as a func-

The real wages index (AWR) of equation

tion of the nominal exchange rate (RATE)and(17) is determined by the growth rate ofthe difference between the nominal interest

employment, the capacity utilization rate, therate of Brazil and the U. S. interest rate.

unemployment rate, price growth, realexchange rate and its own lagged value. Thus

2．7 Reaction Function Sector
In the previous paper［Tokunaga (2001)］,

the real wage rate is determined by an eclectic-

three variables (SELIC, M 2, NFSNO) which

type equation.

are the monetary and fiscal instrument, were2．
5 Price Sector

treated as exogenous.

But government

We estimate the general price index

changes these instruments to achieve the eco-

(IGPDI) of equation (18) as a function of thenomic targets. So, we estimate the three reac-real exchange rate (RATE/IGPDI), narrowtion functions. The results of three equations

money supply (M1), real wages index, GDE,

are equation (29 ) to equation (31).

capital intensity of labor (KR/EMP) and theEquation (29 ) shows the result of estima-

Especially the influence oftion of the interest rate (SELIC). SELIC is

exchange rates dominates to explain a steep

positively influenced by GDE, necessity ofincrease after 1999. The consumer price index

financial sector, FDI ratio and its own lagged(IPCA) of equation (19 ) is estimated as avalue, and negatively influenced by M 2, realtime trend.

⎜ 130 ⎜

exchange rate and balance-of-payment. There-

is increasing, as the reaction coefficient offore the reaction of central bank is higher

NFSNO to GDE is positive. These are reason-

SELIC when GDE is increasing, and the reac-able reaction of the central government.

tion of central bank is higher SELIC when
NFSNO is increasing. However, as the reaction coefficient of SELIC to M 2 is negative,

３．Final Test of the Modelcentral bank seek higher SELIC, when M2 isdecreasing.

The historical simulations of the final tests

As the reaction coefficient ofare very important to evaluate how well thisSELIC to balance of payment is negative,model can simulate the economy. Based on the

SELIC tends to be lower when the surplus of

results of this constructed 31 equations model

balance of payment is bigger. These are goodin which treated NFSNO, M2, and SELIC asreactions of the central bank.

endogenous, we conduct a final test over theEquation (30) shows the result of estima-

period from 1994Q4 to 2000Q2, using thetion of M 2. The wide money supply (M2) isdynamic Gauss-Seidel method.

positively influenced by current account bal-through Figure 8 show the main results of theance and its own lagged value, and negatively

final test. Figure 6,Figure 7 and Figure 8 show

influenced by price growth,SELIC growth,andthe results of the final test of this model for

GDE growth, exchange rate and capital

three variables (SELIC, M 2，NFSNO). We

account. Therefore,M2 tends to increase whenfind that this model is good performance fromthe growth rate of GDE is lower, as the reac-these results. As the results of this final testtion coefficient of M2 to GDE is negative. As

suggest that this model is good performance,

the reaction coefficient of M 2 to IPCA is nega-

we will carry some policy simulations fortive, M 2 tends to decrease when the growthmonetary and fiscal policy.

Figure 1

rate of IPCA is higher (inflation occurs).
These are reasonable reactions of the central
bank.
Equation (31) shows the result of estimation of the nominal financial sector requirement (NFSNO). The NFSNO is positively
influenced by GDE, SELIC and GDP for nonprimary sector growth,and negatively influenced by price growth, and NUCI. Thus, as thereaction coefficient of NFSNO to IGPDI is
negative, NFSNO tends to be lower when the
IGPDI is higher (inflation occurs). Furthermore,NFSNO tends to increase when the GDE⎜ 131 ⎜

Figure 1 Result of final test of wage rate (AWR)

Figure 2 Result of final test of general price index(IGPDI)

Figure 4 Result of final test of foreign direct investment (FDI$)

Figure 3 Result of final test of consumer price index(IPCA)

Figure 5 Result of final test of foreign portfolio
investment (FPF$)

Figure 7 Result of final test of money supply (M2)
Figure 6 Result of final test of nominal interest rate
(SELIC)⎜ 132 ⎜

rate “anchor”. The Real was then introduced
in July 1994.

Case (1): NFSNO is held constant after 1994
Q3. This implies the increase in NFSNO for
this period (without lower NFSNO).

This

causes the cyclical change of SELIC and M2,
and the decrease of GDE and rate of capacity
utilization (NUCI) for 94Q4‑97Q3 period andthe increase with a cyclical change for 97Q4‑
2000Q2 period in Figure 9a and Figure 9b. The
Figure 8 Result of final test of necessity of financial
sector (NFSNO)

private consumption, investment, exports, andimports follow the similar pattern. The consumer price index is increasing rapidly. Thus,

４．Simulation Analysis

we found that this simulation without lower

We tried the following simulations for a

NFSNO (if the government continues highperiod of 1994Q4‑2000Q2 in order to analyze of

NFSNO policy) shows the decrease of GDE

monetary and fiscal policy in Real Plan. The

and high inflation for 94Q4‑97Q3 period and up

two simulation cases are conducted using thisand down business cycle of GDE and high infla-

model. Exchange rate is an exogenous in thetion for 97Q4‑2000Q2 period.

following two cases.
Case (1) NFSNO is held constant after
1994Q3.
Case (2) SELIC is held constant after
1994Q3.

Case (2): SELIC is held constant after 1994Q3.
This implies the higher SELIC for this period.
That is, this is the tight monetary policy. As
the effect of this policy is big, this causes thedecrease of M 2, NFSNO, and NUCI for this

The Real Plan was a stabilization program

period in Figure 10b. Thus, GDE, the private

first announced in December 1993, and thenconsumption, investment are decreasing rapid-

implemented in following three sequential

ly for this period in Figure 10a. The variables

steps: (1) the emergency fiscal adjustment ;of labor market follow the similar pattern.

(2) the elimination of the inflationary inertia,

The consumer price index is decreasing bythrough the conversion ofprices and salaries todegree. Thus, we found that this simulationa stable unit of account (the URV‑the Unit of

without lower SELIC (if central bank con-

Real Value); and (3) monetary reformtinues high SELIC policy) shows the decrease

through the transformation of the URV intoof GDE and low inflation for this period, andthe new currency, the Real as the exchange

conclude that this simulation shows the effects⎜ 133 ⎜

Figure 9 a Policy Simulation (NFSNO is held constant after 19 9 4Q3, Case‑1)⎜ 134 ⎜

Figure 9 b Policy Simulation (NFSNO is held constant after 19 9 4Q3, Case‑1)⎜ 135 ⎜

Figure 10a Policy Simulation (SELIC is held constant after 19 9 4Q3, Case‑2)⎜ 136 ⎜

Figure 10b Policy Simulation (SELIC is held constant after 19 9 4Q3, Case‑2)⎜ 137 ⎜

ment Macroeconomics, Second Edition, Princeton

of tight monetary policy as we expected.

University Press, 1999.
Amann, Edmund and Werner Baer, “The Illusion of
Stability: The Brazilian Economy Under Car-

５．Conclusion

doso”, World Development, Vol. 28, No. 10, pp.

In this paper, we have constructed the prototype quarterly econometric model for the

1805‑1819, 2000.
Baer, Werner, The Brazilian Economy: Growth andDevelopment, 5 Edition, PRAEGER, 2001.

Brazilian economy (1994Q4‑2000Q2) with 31

Eustaquio J.Reis,M arco A.F.H.Cavalcanti,A.S.deendogenous variables in order to analyze theCastro, J. L. Rossi, Jr. and E. R. de Araujo, “Amonetary and fiscal policy during Brazilʼ
s RealPlan, and estimated the central bank and theBrazilian Quarterly Economic M odel”, paperpresented at the Project LINK world conference,
1998.

central government reaction functions for

Fukuchi,Takao,“
An Investigation of Virtuous Circle

three variables (SELIC,M 2,and NFSNO). We

Between Real and M onetary Aspects of Brazilian
Economy”, Discussion Papers of IPEA, 2000.

found that this model including reaction func-

Fukuchi,Takao and Suminori Tokunaga,“
Simulation

tion was good performance from a good final

Analysis of Exchange Rate Dynamics: the Casetest result. Finally,we tried the following twoof Indonesia”,The Developing Economies,Vol.37,

simulations for the period of 1994Q4‑2000Q2

No. 1, pp. 35‑58, 2000.
Maria L. F. Silva and Thomas S. Torrance,

using this model: Case (1) NFSNO is held“
Exchange rate based stabilization plans,”

constant after 1994Q3 and case (2) SELIC is

ECONOMIA APLICADA, Vol. 2. 1 pp. 31‑64,

held constant after 1994Q3. We found that two

1998.
Tokunaga, suminori, “Primary commodity, FDI andsimulations show the effects of fiscal andEconomic Development in Indonesia : Anmonetary policy as we expected.

Econometric Model of the Indonesian Economy(1987‑97)”,Journal of International and regional
Economics, Vol. 1, pp. 130‑154, 2000.
Tokunaga, suminori, “A Quarterly Econometric

Reference
Abel and Bernanke, Macroeconomics 4Model for the Brazilian Economy (1994Q4‑
Edition,

2000Q2)”, Working Paper for Institute of Economic Research of Nagoya City University, 2001.

Addison-Wesley Publishing Company, 2001.
Agenor,Pierre-Richard and Peter J. Montiel,Develop-⎜ 138 ⎜

⎜ 139 ⎜GDP forPrimary
SectorTaxnominalGDP

GDP

InvestmentofConstruction

CapitalStock

Net Exports(Exports
minus Importsof Goods)

GeneralPrice Index

Trade
Balance

Rate of
Capacity
Utilization

Investment of
Machineryandequipment

Employment

M1

Current
Account

Importsof Goods

GDE

Accumulationof nealForeign Direct
Investment

Balance ofPayment

Transfers

Service
Balance

Foreign
Currency
Reserve

Investment

Goverment
FainalConsumption

Net NonFactor
Services

Foreign
DirectInvestment

Capital
Account

Error of
Foreign
Currency
Reserve

GDP for Nonprimary Sector

Figure A1 Flowchart of the Brazilian Quarterly Econometric Model

Exportsof Goods

NominalInterest
Rate

Real Foreign
DirectInvestment

Nominal
Exchange
Rate

Rate of
Unem ployment

M2

CPI

Depreciation
for Capital
stock

Wage Rate

Private Finalcosumption

Necessity of
Financial
Sector

GDP in U. S.

Disposable
IncomeEconomic
ActivePopulation

Price for
Importof Goods

Other
ForeignInvestment

Foreign
Portfolio
Investment

Interest in
U. S.

Appendix A: A Brazilian Quarterly Econometric Model
A：Final Demand Sector⑴

Private Final Consumption Expenditure (CP)CP/PTO＝0.1322＋0.2903 (YD(‑1)/PTO(‑1))− 0.0060 (SELIC(‑3)/SELIC(‑4))(5.03) (2.19 )(−3.16)＋1.11E‑05 (M 2(‑3)/IPCA(‑3))− 0.0002 (NFSNO(‑1))− 0.0149 (RATE/RATE(‑1))(1.62)(−1.28)(−2.69 )− 0.0006 (＠TREND)＋0.0269 (D94Q4)− 0.0095 (D95Q4)(−1.13)(6.46)(−3.26)＋0.0067 (＠SEAS(1))＋0.0115 (＠SEAS(2))＋0.0091 (＠SEAS(3))(3.12)(4.46)(5.30)
R ＝0.9305，RA ＝0.8609 ，SE ＝0.0024，SD ＝0.0063，D W ＝2.51，F ＝13.4⑵

Investment of Machinery and equipment (INVM )INVM /KR(‑1)＝−0.0138＋0.0035 (Y23(‑1)/Y23(‑2))＋0.00014 ((NUCI(‑3)＋NUCI(‑4))/2)(−2.44) (1.89 )(1.97)− 0.0011 (SELIC(‑2)/SELIC(‑3))＋0.0040 (SFDIR(‑2)/SFDIR(‑3))(−2.47)(5.06)＋0.0005 (IM (‑2)/GDE(‑2))＋0.6534 (INVM (‑1)/KR(‑2))(2.15)(6.82)− 0.0030 (DESA(‑3)/DESA(‑4))＋0.0006 (D95Q1)− 0.0023 (＠SEAS(1))(−2.52)(0.81)(−4.07)− 0.0011 (＠SEAS(2))− 0.0016 (＠SEAS(3))(−1.80)(−1.90)R ＝0.9421，RA ＝0.8841，SE ＝0.0004，SD ＝0.0010，D W ＝1.71，F ＝16.3⑶

Investment of Construction (INVC)

INVC/KR(‑1)＝−0.0106＋0.0071 (GDP(‑1)/GDP(‑2))(−1.34) (1.21)＋7.98E‑05 ((NUCI(‑1)＋NUCI(‑2)＋NUCI(‑3))/3)(1.68)−0.00060 (SELIC(‑1)/SELIC(‑2))＋0.7584 (INVC(‑1)/KR(‑2))(−2.00)(7.18)− 0.0009 (D95Q2)− 0.0008 (D95Q3)＋0.00030 (＠SEAS(1))(−3.32)(−2.66)(1.21)＋0.0012 (＠SEAS(2))＋0.0008 (＠SEAS(3))(4.38)(3.70)
R ＝0.9233，RA ＝0.8703，SE ＝0.0002，SD ＝0.0006，D W ＝2.00，F ＝17.4⎜ 140 ⎜

⑷Investment (INV)

INV＝(INVM ＋INVC)/(1−0.026)⑸

Exports of Goods (X)

X/GDP(−1)＝−14.390＋12.110 (GDPUS(‑1)/GDPUS(‑2))(−2.30) (1.97)＋2.8653 (NUCI(‑3)/NUCI(‑4))＋1.5081 (Y1/GDP(‑1))(1.65)(2.40)＋23337.2 (RATE(‑2)/IGPDI(‑2))＋6.0812 ((X(‑1)＋X(‑2))/(KR(‑1)＋KR(‑2)))(1.70)(3.21)＋0.3308 (D97Q2)− 0.4355 (＠SEAS(1))＋0.4911 (＠SEAS(2))＋0.4361 (＠SEAS(3))(1.85)(−3.15)(3.58)(3.35)
R ＝0.9118，RA ＝0.8507，SE ＝0.1465，SD ＝0.3791，D W ＝1.75，F ＝14.9⑹

Imports of Goods (IM )IM /GDP(‑1)＝−2.3921＋5.2846 (GDE(‑1)/GDE(‑4))− 290.75 (SELIC(‑1)/IGPDI(‑1))(−1.50) (3.89 )(−1.74)＋2.3209 (IM (‑1)/(KR(‑1))＋0.4383 (RES$(‑2)/KR(‑2))(1.97)(2.51)−27775.04 (RATE(‑1)/IGPDI(‑1))− 0.6401 (D97Q1)− 0.5192 (＠SEAS(1))(−1.18)(−3.32)(−5.09 )＋0.4848 (＠SEAS(2))＋0.2780 (＠SEAS(3))(3.53)(2.35)
R ＝0.9180，RA ＝0.8612，SE ＝0.1655，SD ＝0.4442，D W ＝1.27，F ＝16.2⑺

Net Exports (XMGSNF)

XM GSNF＝(X−IM ＋SERNF$) RATE 1000/IGPDI⑻

GDE

GDE＝CP＋CG＋INV＋XMGSNF

B：Supply and Capital Stock Sector⑼

GDP for Non−primary Sector (Y23)

Y23/EMP(‑1)＝0.0559 ＋0.0505 ((NUCI(‑1)/100) (KR(‑1)/EMP(‑1)))(1.28) (2.18)＋0.0021 (M 2(‑1)/KR(‑1))＋0.0413 (SFDIR(‑2)/SFDIR(‑3))(2.86)(6.42)＋0.0515 (D95Q1)− 0.0299 (D95Q3)− 0.0196 (D95Q4)(11.8)(−6.42)(−4.30)⎜ 141 ⎜

− 0.0088 (＠SEAS(1))＋0.0057 (＠SEAS(2))＋0.0100 (＠SEAS(3))(−3.40)(2.30)(3.62)
R ＝0.9616，RA ＝0.9350，SE ＝0.0037，SD ＝0.0145，D W ＝2.57，F ＝36.2⑽

GDP for primary sector

Y1＝GDP−Y23

Nominal GDP
GDPV＝GDP IGPDI

Capital Stock
KR＝KR(−1)＋INV−DEPR

Rate of Capacity Utilization (NUCI)NUCI＝2.8631＋41.574 (GDE(‑1)/GDE(‑4))＋19.660 (Y23(‑1)/EM P(‑1))(0.26) (5.79 )(1.27)＋0.3934 (NUCI(‑1))− 1.6222 (SELIC(‑1)/IPCA(‑1))＋0.8126 (FDIR/FDIR(‑1))(3.56)(−1.74)(3.05)＋2.0554 (D96Q1)− 2.3134 (D99 Q3)− 3.4553 (＠SEAS(1))＋2.3790 (＠SEAS(2))(2.28)(−2.55)(−7.38)(3.48)＋0.9808 (＠SEAS(3))(1.70)
R ＝0.9288，RA ＝0.8694，SE ＝0.6928，SD ＝1.9171，D W ＝1.89 ，F ＝15.6

C：Income Sector
Disposable Income
YD＝(GDPV−TAX)/IGPDI

D：Labor Sector
Rate of Unemployment (DESA)DESA＝−11.954＋0.0262 (AWR(‑2))＋57.206 (GDE(‑2)/EMP(‑2))(−2.02) (2.17)(1.49 )

＋5.8494 (KR(‑2)/EM P(‑2))− 12.551 (NUCI(‑1)/NUCI(‑2))(2.30)(−2.21)＋2.1985 (＠SEAS(1))＋1.5985 (＠SEAS(2))＋1.8633 (＠SEAS(3))(7.51)(4.35)(3.90)
R ＝0.9381，RA ＝0.9092，SE ＝0.4470，SD ＝1.4838，D W ＝1.98，F ＝32.5⎜ 142 ⎜

Employment
EMP＝PTO (1−DESA/100)

Wage Rate (AWR)
log(AWR/AWR(‑1))＝0.4977− 0.7851 log(EMP(‑2)/EMP(‑3))(2.31) (−1.16)＋0.7276 log(NUCI(‑1)/NUCI(‑2))− 0.0416 log((DESA(‑3)＋DESA(‑4))/2)(2.71)(−1.17)＋0.0601 log(IGPDI(‑2)/IGPDI(‑3))＋0.0738 log(RATE(‑2)/IPCA(‑2))(2.14)(2.01)＋0.4318 log(AWR(‑2)/AWR(‑3))− 0.0421 (D95Q3)＋0.0601 (D96Q1)(3.18)(−1.68)(1.94)− 0.2039 (＠SEAS(1))− 0.0544 (＠SEAS(2))− 0.0715 (＠SEAS(3))(−12.1)(−3.35)(−2.22)
R ＝0.9639 ，RA ＝0.9278，SE ＝0.0195，SD ＝0.0725，D W ＝2.44，F ＝26.7

E：Price Sector
General Price Index (IGPDI)
IGPDI/IGPDI(‑1)＝0.8087＋0.1085 (RATE/RATE(‑1))＋6487.7 (RATE(‑1)/IGPDI(‑1))(8.62) (10.3)(16.1)＋0.0180 (M 1/M 1(‑1))＋0.0237 (AWR(‑3)/AWR(‑4))＋0.2199 (GDE(‑3)/GDE(‑4))(1.75)(1.41)(3.42)− 0.0588 (KR(‑1)/EMP(‑1))− 0.0020 (＠TREND)− 0.0360 (D95Q4)(−1.57)(−4.21)(−7.18)− 0.0230 (D96Q4)− 0.0156 (＠SEAS(1))− 0.0152 (＠SEAS(2))− 0.0073 (＠SEAS(3))(−4.13)(−2.26)(−2.67)(−1.45)R ＝0.9812，RA ＝0.9586，SE ＝0.0039 ，SD ＝0.0192，D W ＝1.85，F ＝43.4

Consumer Price Index(IPCA)
IPCA/IPCA(‑1)＝1.0209 ＋0.0337 (RATE/RATE(‑1))＋3233.7 (RATE(‑1)/IGPDI(‑1))(23.4) (3.63)(6.05)＋0.0392 (M 2/M 2(‑1))＋0.0003 ((PIM (‑3)＋PIM (‑4))/2)−6.73E‑07 (SELIC(‑2))(2.31)(1.11)(−1.39 )＋0.0006 (NFSNO(‑2))− 0.0026 (＠TREND)− 0.0130 (D96Q4)(6.20)(−8.21)(−3.01)＋0.0063 (＠SEAS(1))＋0.0040 (＠SEAS(2))− 0.0008 (＠SEAS(3))(2.37)(1.59 )(−0.32)
R ＝0.9848，RA ＝0.9695，SE ＝0.0038，SD ＝0.0218，D W ＝1.92，F ＝64.6⎜ 143 ⎜

F：Balance of Payment Sector
Trade Balance (TB$)
TB$＝X−IM

Current Account Balance (CA$)
CA$＝TB$＋SER$＋TUN$

Foreign Direct Investment (FDI$)
FDI$＝79844.3＋16.9507 (GDE(‑1))−143128.0 (GDPUS(‑1)/GDPUS(‑2))(1.39 )

(3.85)(−2.53)＋7653.5 (RATE/RATE(‑1))＋0.2996 (FDI$(‑1))− 3709.5 (D95Q2)(2.54)(1.81)(−2.30)＋66.988 (＠SEAS(1))＋3752.6 (＠SEAS(2))−821.49 (＠SEAS(3))(0.08)(3.61)(1.05)
R ＝0.8857，RA ＝0.8203，SE ＝1266.0，SD ＝2986.8，D W ＝2.15，F ＝13.6

Foreign Portfolio Investment (FPF$)
FPF$−FPF$(‑1)＝−4513.2＋1435.8 (RATE)＋53.724 (SELIC−INTRUS)(−1.85) (1.09 )(1.51)＋7764.8 (D98Q1)−11949.5 (D98Q3)−8395.1 (D98Q4)(3.81)(−5.74)(4.14)＋1268.6 (＠SEAS(1))＋1975.2 (＠SEAS(2))−1547.4 (＠SEAS(3))(1.08)(1.74)(1.24)
R ＝0.8526，RA ＝0.7683，SE ＝1849.1，SD ＝3841.5，D W ＝1.95，F ＝18.6

Capital Account Balance (CAP$)
CAP$＝FDI$＋FPF$＋CAPOTH$

Real Foreign Direct Investment (FDIR)
FDIR＝FDI$ RATE 1000/IGPDI

Accumulation of Real Foreign Direct Investment (SFDIR)SFDIR＝SFDIR(‑1)＋FDIR

Balance of Payment (BP$)
BP$＝CA$＋CAP$⎜ 144 ⎜

Foreign Reserve (RES$)
RES$＝RES$(‑1)＋BP$＋RESE$

G：Reaction Function Sector
Nominal Interest rate (SELIC)SELIC＝−24.434− 0.2733 (BP$(‑2)/BP$(‑3))−822486.9 (RATE(‑1)/IGPDI(‑2))(−0.34) (−1.31)(−3.70)− 34.279 (M 2(‑1)/M 2(‑2))＋0.0235 (GDE(‑2))＋0.3638 (NFSNO(‑2))(−1.55)(1.56)(2.60)＋34.618 (FDIR(‑1)/SFDIR(‑1))＋0.6280 (SELIC(‑1))(1.68)(5.45)− 7.0579 (＠SEAS(1))− 4.9176 (＠SEAS(2))− 2.5570 (＠SEAS(3))(−2.48)(−1.84)(−0.84)
R ＝0.9533，RA ＝0.9143，SE ＝3.9730，SD ＝13.574，D W ＝2.52，F ＝24.5

Money Supply (M2)
(M 2/IGPDI(‑1))/GDE(‑1)＝0.0028− 0.0002 (IPCA(‑2)/IPCA(‑3))(3.80) (−6.24)−2.92E‑05 (SELIC/SELIC(‑2))− 0.0024 (GDE(‑1)/GDE(‑2))＋3.96E‑09 (CA$(‑1))(−0.67)(−3.37)(0.64)−1.60E‑09 (CAP$(‑1))−8.23E‑05 (RATE(‑1)/RATE(‑2))(−1.31)(−1.02)＋1.0108 (M 2(‑1)/IGPDI(‑2)/GDE(‑2))−7.24E‑05 (＠SEAS(1))(31.9 )(−1.81)−9.21E‑05 (＠SEAS(2))＋1.87E‑05 (＠SEAS(3))(−2.51)(0.59 )
R ＝0.9928，RA ＝0.9867，SE ＝3.41e−05，SD ＝0.0003，D W ＝2.27，F ＝164.8

Necessity of Financial Sector (NFSNO)NFSNO＝8.8478− 0.0003 (BP$(‑2))− 0.0007 (IGPDI(‑2))(0.18) (−4.61)(−6.48)＋ 9.0740 (SELIC(‑3)/SELIC(‑4))− 1.0489 (NUCI(‑2))(−5.43)(−2.92)＋429.52 (GDE(‑2)/EMP(‑2))＋20.020 (Y23(‑1)/Y23(‑2))(2.87)(2.48)− 0.0928 (＠SEAS(1))＋3.8260 (＠SEAS(2))− 2.8568 (＠SEAS(3))(−0.06)(1.91)(−1.39 )⎜ 145 ⎜

Appendix B : Variables List of Quarterly Econometric Model
AWR

Wage Rate

Index

BP$

Balance of Payment

Millions of US Dollars

CA$

Current AccountMillions of US Dollars

CAP$

Capital AccountMillions of US Dollars

CAPOTH$

Other Foreign Investment except FDI$ andMillions of US Dollars

FPF$
in CAP$CG

Government Final consumption

Millions of Reais, 1990 prices

CP

Private Final consumption

Millions of Reais, 1990 prices

DESA

Rate of Unemployment

Percent

DEPR

Depreciation for Capital stock

Millions of Reais, 1990 prices

DiQj

Dummy

1 (when i year j quarterly), 0 (other)

EM P

Employment

Million of Person

FDI$

Foreign Direct Investment

Millions of US Dollars

FDIR

Real Foreign Direct Investment

FDI$ RATE 1000/IGPDI

FPF$

Foreign Portfolio Investment

Millions of US Dollars

GDE

GDE

Millions of Reais, 1990 prices

GDP

GDP

Millions of Reais, 1990 prices

GDPV

Nominal GDP

Thousands of Reais

GDPUS

U. S. GDP

Millions of US Dollars, 1990 prices

IPCA

CPI

Index

IPCAUSU. S. CPI

Index

IGPDI

General Price Index

Index

IM

Imports of Goods

Millions of Reais, 1990 prices

INTRUS

Nominal Interest Rate in U. S.

Percent

INV

Investment

Millions of Reais, 1990 prices

INVC

Investment of Construction

Millions of Reais, 1990 prices

INVM

Investment of Machinery and equipment

Millions of Reais, 1990 prices

KR

Capital StockMillions of Reais, 1990 prices

M1

Narrow M oney Supply

Millions of Reais

M2

Wide M oney Supply

Millions of Reais

NFSNO

Necessity of Financial Sector

Index

NUCI

Rate of Capacity Utilization

Index

PIM

Prices for Import of Goods

Index

PTO

Economic Active Population

Millions of Person

RATE

Nominal Exchange Rate

Real per US Dollars⎜ 146 ⎜

RES$

Foreign Currency Reserve

Millions of US Dollars

RESE$

Error of Foreign Currency Reserve

Millions of US Dollars

SELIC

Nominal Interest Rate

Percent

SER$

Service balance

Millions of US Dollars

SERNF$Net Non-Factor Services

Millions of US Dollars

SFDIR

Accumulation of real Foreign Direct

FDIR (94Q1)＋....＋FDIR (2000Q2)

Investment
TAX

Tax Revenue

Thousands of Reais

TB$

Trade Balance

Millions of US Dollars

TUN$

Transfers

Millions of US Dollars

X

Exports of Goods

Millions of US Dollars

XM GSNF

Net Exports (Exports minus Imports ofMillions of US Dollars

Goods plus SERNF$)
Y1

GDP for Primary Sector

Millions of Reais, 1990 prices

Y23

GDP for Primary Sector

Millions of Reais, 1990 prices

YD

Disposable Income

Thousands of Reais, 1990 prices＊ :exogenous variable⎜ 147 ⎜