Transfer function and intervention models for the study of Brazilian inflationary process

In this paper, the dynamics of the Brazilian inflationary process have been investigated using transfer function models in January, 1980 - December, 1993, considering the major determinants of inflation: monetary base, wages, federal debt, rate of interest, and rate of exchange. The effects of these exogenous variables and the intervention variables that represent structural changes and/or external shocks provoked by stabilizing plans on the inflation rate have been analyzed. The results showed that if the exogenous variables are brought under control then the inflationary process too. As a final comment, we are led to believe that the inertial component of the inflation rate is relatively low enough to be used as a guide for bringing stability to the price level. Since the inertial coefficient is much less than unity, if the exogenous variables are brought under control then inflation should subside gradually to about half of its value each month that passes. Governmental controls of the price level should be avoided since they disrupt expectations and inevitably lead to higher inflation rates.