Introduction to the Special Issue on DSGE Models for the Brazilian Economy
Authors: Carmargo Braz , Guimaraes Bernardo 
Published: June 2016

Dynamic Stochastic General Equilibrium (DSGE) models have become the

standard framework for quantitative macroeconomic analysis in the world. Naturally,

there is now a growing literature on DSGE models designed to study the

Brazilian economy. A conference organized by the Centro Macro Brasil of the

Sao Paulo School of Economics – FGV, sponsored by the Instituto de Pesquisa

Econˆomica Aplicada (IPEA), on August 22, 2014 featured papers using DSGE

models applied to Brazil. This special issue of the Brazilian Review of Econometrics

contains five papers presented in the conference.

The Brazilian Central Bank (Banco Central do Brasil) has its own DSGE

model, the so-called SAMBA. The paper that presents and analyses the model,

by Marcos de Castro, Solange Gouvea, Andr´e Minella, Rafael Santos and Nelson

Souza-Sobrinho, leads this special issue. SAMBA is a large scale DSGE model

with a few features designed to bring it closer to the Brazilian economy, namely,

the presence of administered prices, an explicit target for the primary surplus,

a fraction of households with no access to financial markets, external finance of

imports, and imports used as inputs in the production function. SAMBA can be

used as a tool for forecasting and for assessing the impact of different shocks.

The second paper in this volume, by Fabio Kanczuk, shares the same objectives

but employs a medium scale DSGE model of a small open economy. The model is

then estimated to understand which shocks can explain the observed fluctuations

in output in the last 15 years. The model is also used to assess the economic

impacts of a hypothetical currency depreciation and to check the hypothesis that

monetary policy has become more powerful over time in Brazil.

The next paper in this volume, by Marco Cavalcanti and Luciano Vereda,

builds a DSGE framework with a rich modeling of the public sector that explicitly

considers public employment as well as other types of public expenditures, public

investments and transfers. The model also incorporates a fairly detailed fiscal apparatus

comprising several policy instruments both on the taxation and spending

sides, and considers different fiscal rules. The model is thus able to quantify the

macroeconomic effects of shocks to different types of fiscal policy in the short and

medium run.

The fourth paper in this volume, by Vladimir Teles, Celso Costa J´unior and

Rafael Rosa, presents a DSGE model with two sectors that incorporates technical progress in the investment goods sector. This is motivated by evidence of the

importance of this channel that they also document in the paper. They show

that incorporating productivity shocks specific to the investment goods sector in

the model affects the results in important ways. In particular, optimal monetary

policy is more rigorous than in standard models.

Most DSGE models applied to the Brazilian economy do not use data from the

periods preceding the adoption of the inflation targeting regime in 1999. In the

last paper of this volume, Carlos Carvalho and Andr´e Vilela build a DSGE model

to investigate the transition between the different exchange rate (and monetary

policy) regimes that took place in 1999. Their results support the transition to

the inflation targeting regime in 1999, but suggest that an earlier transition in the

first half of 1998 might have been even better.

The papers in this special issue highlight the main advantages of the use of

DSGE models for quantitative macroeconomic analysis. As put by Kanczuk, a

DSGE model “forces one to think in terms of exogenous shocks and endogenous

responses, and thus to ask sensible questions”. Castro et al. add that DSGE

models “can be successfully used as a story-telling device in the policymaking

process.” We hope that by bringing together a number of papers applying the

DSGE methodology to study the Brazilian macro economy, this volume serves

both as a useful guide to and as an inspiration for researchers interested in working

in this area.