Identification of Monetary Policy Shocks in the Brazilian Market for Bank Reserves

Abstract

We estimate an identified VAR (SVAR) with contemporaneous restrictions derived from a model of the market for bank reserves, which allows us to disentangle monetary policy shocks from demand shocks for reserves in Brazil. The main results are: i) the Central Bank of Brazil acts in order to smooth the bank reserve market interest rate (Selic); ii) the spread between the Selic rate and the discount rate provides information to estimate the demand curve for borrowed reserves; iii) overidentifying restrictions show that we cannot reject, for any period or model, the interest rate operational target hypothesis, even during the fixed exchange rate regime; iv) the impulse response functions show that shocks to the demand for reserves and to borrowed reserves generate statistically significant responses in real output and the inflation rate; v) all models display the liquidity effect and a small inflation rate puzzle.