Monetary policy and regional output in Brazil

The objective of the present study is to examine the effects of the Brazilian monetary policy on its five major regions during the period 2002 to 2011. The regional effects of monetary policy on Brazilian economic activity are examined using two approaches: without and with the decomposition of the regional output. According to the literature, asymmetry is expected in the first case and symmetry in the second. To verify the behavior of macroeconomic variables in response to monetary policy shocks and to measure the impact of this policy, we estimate a vector autoregression (VAR). To decompose the regional output into common and idiosyncratic components, we use principal component analysis (PCA). Although the high correlation among the series of regional outputs indicates co-movement, we verify whether the common component has similar responses to the national output if it is included in a vector autoregressive model. The strategy continues with the analysis of the idiosyncratic, or region-specific, component to verify whether there are significant effects in response to monetary policy and whether these effects are symmetrical. The results were consistent with our expectations. If the estimates did not consider the decomposition of regional outputs into common and idiosyncratic components, the effects of monetary policies were asymmetric: the output responses of the North, Northeast and Midwest to monetary policies were not significantly different from zero, whereas in the South and Southeast regions, they indicated significance. However, if the outputs were decomposed, we observed that the regional common component was responsive to monetary policy shocks, whereas the responses of the idiosyncratic components were not significantly different from zero. Based on the results, we cannot reject the hypothesis that the effects of the Brazilian monetary policy on regional economic activity are symmetric.

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