Brazilian Economy

“The Brazilian Business Cycle and Growth Cycle,” Brazilian Economic Journal (Revista Brasileira de Economia), Vol. 56 nº 1, 75-106, 2002. (Download BrazilBCGC or Repec )

Abstract: This paper uses several procedures to date and analyse the Brazilian business and growth cycles. In particular, a Markov switching model is fitted to quarterly and annual real production data. The smoothed probabilities of the Markov states are used as predictive rules to define different phases of cyclical fluctuations of real Brazilian economic activity. The results are compared with different non-parametric rules. All methods implemented yield similar dating and reveal asymmetries across the different states of the Brazilian business and growth cycles, in which slowdowns and recessions are short and abrupt, while high growth phases and expansions are longer and less steep. The resulting dating of the Brazilian economic cycles can be used as a reference point for construction and evaluation of the predictive performance of coincident, leading, or lagging indicators of economic activity. In addition, the filtered probabilities obtained from the Markov switching model allow early recognition of the transition to a new business cycle phase, which can be used, for example, for evaluation of the adequate strength and timing of countercyclical policies, for reassessment of projected sales or profits by businesses and investors, or for monitoring of inflation pressures.

"Leading Indicators of the Capital Goods Industry in Brazil," with Igor Morais, Brazilian Review of Econometrics, Vol. 31, No. 1, 137-171, 2011.  Recipient of Honor Award from the National Confederation of Industries of Brazil  - Confederacao Nacional das Industrias, CNI. (Download LeadingCapital)  

Abstract: The goal of this paper is to build leading indicators to predict the capital goods business cycle in Brazil. We propose a probit model with autoregressive dynamics consisting of series with predictive power to anticipate contractions in this sector. The model is especially suitable for this sector as it includes information about the characteristics of cycle phases and their duration in the estimation of recession probability, and adapts well to the high volatility of the capital goods business cycle. The results indicate that the dynamic probit model has a better forecasting performance than the simple probit model in several aspects, both within and out of sample and in real time. 

“A Monthly Indicator of Brazilian GDP,” in Brazilian Review of Econometrics Vol. 21, No. 1, 1-15, 2001 – Recipient of Honor Award from the Brazilian Econometric Society. (Download BrazilIndicatorGDP)

Abstract: This paper constructs an indicator of Brazilian GDP at the monthly frequency. The peculiar instability and abrupt changes of regimes in the dynamic behavior of the Brazilian business cycle were explicitly modeled within nonlinear frameworks. In particular, a Markov switching dynamic factor model was used to combine several macroeconomic variables that display simultaneous comovements with aggregate economic activity. The model generates as output a monthly indicator of the Brazilian GDP and real time probabilities of the current phase of the Brazilian business cycle. The monthly indicator shows a remarkable historical conformity with cyclical movements of GDP. In addition, the estimated filtered probabilities predict all recessions in sample and out-of-sample. The ability of the indicator in linear forecasting growth rates of GDP is also examined. The estimated indicator displays a better in-sample and out-of-sample predictive performance in forecasting growth rates of real GDP, compared to a linear autoregressive model for GDP. These results suggest that the estimated monthly indicator can be used to forecast GDP and to monitor the state of the Brazilian economy in real time.

“Leading Indicators of the Brazilian Inflation,” Economic Research and Planning (Pesquisa e Planejamento Economico), Vol. 31, 1, 323-354, 2001. (Download Repec - English or BrazilLeadingInflation-Portuguese).

Abstract: The goal of this project is to construct leading indicators that anticipate inflation cycle turning points on a real time monitoring basis. As a first step, turning points of the IPCA inflation are determined using a periodic stochastic Markov switching model. These turning points are the event timing that the leading indicators should anticipate. A dynamic factor model is then used to extract common cyclical movements in a set of variables that display predictive content for inflation. The leading indicators are designed to serve as practical tools to assist real-time monitoring of monetary policy on a month-to-month basis. Thus, the indicators are built and ranked according to their out-of-sample forecasting performance. The leading indicators are found to be an informative tool for signaling future phases of the inflation cycle out-of-sample, even in real time when only preliminary and unrevised data are available.

"Trend-Cycle Decomposition of the Brazilian GDP: New Facts for the period between 1947 and 2012."  with L.S. Lopes and J.E. Lima. Proceedings of the 45th National Economic Meeting (ANPEC). 2017, Natal, RN, Brazil. (Download)

Abstract: We provide information about the Brazilian business cycle from 1947 to 2012, by suggesting a new method that averages over a variety of HP-filters and creates a set of facts which are more related to CODACE dates of expansions and recessions. The main findings are that Brazilian business cycle is asymmetric, with expansions lasting longer than recessions; the long term trend presented a noticeable flatter slope after the 1980s, thus, real long-term growth rate decreased by 50%, from 8% per year, between 1947 and 1980, to 4% per year after that; and, output volatility decreased after 1996-1997, when a statistically significant structural break occurred.

“Leading Indicators of Recession for the Brazilian Economy,” with Jose A. B. da Silva, in Proceedings of the XXVI Meetings of the Brazilian Econometric Society, 2004, Joao Pessoa, Paraiba, Brazil. (Download)

Abstract: O objetivo deste artigo é a construção de indicadores que antecipem o início dos ciclos econômicos brasileiros. Como primeiro passo, os pontos de mudanças dos ciclos econômicos foram determinados usando-se um modelo de fator dinâmico com mudança de Markov. Estes pontos são os eventos que os indicadores devem antecipar. Os modelos probit são então utilizados para extrair indicadores antecedentes de recessão de um grupo de variáveis que possuem poder de previsão com relação ao PIB. Os indicadores antecedentes são construídos para servir como um instrumento prático de auxílio à política monetária com base mensal. Assim, os indicadores são construídos e classificados de acordo com o seu poder de previsão dentro e fora de amostra. Os resultados empíricos revelam que os indicadores antecedentes resultantes constituem-se em um instrumento informativo para sinalizar fases futura do ciclo econômico brasileiro.

"The End of the Brazilian Big Inflation: Lessons to Monetary Policy from a Standard New Keynesian Model," with L.S. Lopes and J.E. Lima, Empirical Economics, 2017, 1-31. (Download) 

Abstract: The paper analyzes economic stabilization in Brazil in the context of a New Keynesian model estimated with Bayesian techniques. Dataset covers the period 1975–2012. Our methodology is based on tests for multiple structural breaks at unknown dates and counterfactual exercises. The results show that inflation and output volatility present an inverted U-shape pattern, peaking at the 1985–1994 sample. Changes in the monetary policy stance and milder shocks accounted for the reduced inflationary volatility (about 50% each, in some specifications). However, some assumptions indicated that a sharp decline in the Phillips curve slope was also important for controlling inflation. Concerning to output, the sole explanation for its volatility fall seemed to be smaller shocks. Therefore, we conclude that a mix of the “good luck” and “good policy” hypotheses mainly originated the current period of increased stability in the country.

"Chronology and Prediction of Business Cycles in Minas Gerais" ("Cronologia e Previsão de Ciclos Econômicos de Minas Gerais"). Cadernos BDMG. February, 7-44, 2013. (Portuguese Download)

Abstract: Esse artigo utiliza modelos probabilísticos de fronteira para obter uma cronologia dos ciclos econômicos de Minas Gerais, e para construir indicadores coincidentes e antecedentes da economia mineira. O modelo de fator dinâmico com mudanças de regime de Markov é utilizado para representar os movimentos cíclicos e determinar o começo e fim das fases de recessão e expansão em Minas Gerais. Esse modelo gera um indicador coincidente da economia mineira e probabilidades de recessões e expansões, as quais podem ser utilizadas para analisar e monitorar as diferentes características das fases dos ciclos econômicos. O artigo também propõe a construção de indicadores antecedentes, utilizando um modelo probit dinâmico. O modelo gera não somente probabilidades de recessões futuras, como também probabilidades de continuação ou interrupção de uma fase do ciclo. Esse enfoque também permite avaliação do grau de incerteza ou precisão dessas probabilidades. O indicador coincidente estimado apresenta uma conformidade histórica notável com movimentos cíclicos do PIB mineiro, com relação a sua volatilidade, duração das fases e timing de seus pontos de mudança. Quanto aos indicadores antecedentes, as probabilidades obtidas do modelo probit prevêem todas as recessões na amostra considerada, com uma antecedência de um a dois trimestres. Além disso, a identificação de recessões futuras é nítida uma vez que asprobabilidades aumentam acima de 80% antes de todas as recessões mineiras, e não produzem sinais falsos. O modelo probit também é estimado em tempo real fora de amostra para o período recente.

"Forecasting Brazilian Output and its Turning Points in the Presence of Breaks: A Comparison of Linear and Nonlinear Models,” with E. Lima, G. Domingues, and B. Vasquez, Economic Studies (Estudos Economicos), Vol. 36, No.1, 5-46, 2006. (Download BR_TPBreak) 

Abstract: This paper compares the forecasting performance of linear and nonlinear models under the presence of structural breaks for the Brazilian real GDP growth. The Markov-switching models proposed by Hamilton (1989) and its generalized version proposed by Lam (1991) are applied to quarterly GDP from 1975:1 to 2000:2 allowing for breaks at the Collor Plans. The probabilities of recessions are used to analyze the Brazilian business cycle. The ability of each model in forecasting out-of-sample the growth rates of GDP is examined. The forecasting ability of the two models is also compared with linear specifications. The authors find that nonlinear models display the best forecasting performance and that specifications including the presence of structural breaks are important in obtaining a representation of the Brazilian business cycle.