Prepared by Alfredo M. Leone.
Several countries that rely on a consumer price index in specifying their inflation targets have introduced various caveats (or escape clauses) to enable temporary deviations in the event that these are caused by factors beyond the control of the central bank. Substantial increases in indirect taxes, changes in government-controlled prices, and the effects of natural disasters are the most common among such factors.
External, aggregate demand and aggregate supply shocks are seen as the most relevant for Brazil. Given the aggregate nature of the simple structural models, the stylization of the shocks require a careful work to reflect their intensity and timing in the simulations.
The authorities are well aware of the limitations of the estimates and forecasts from these models given that the economy underwent a number of radical structural changes in the last years.
This is known in the literature on inflation targeting as the fan chart approach
Other instruments include reserve requirements, and financial assistance for liquidity. Through the use of its monetary policy instruments, the Central Bank of Brazil influences the availability and cost of the bank reserves, ultimately determining the prevailing credit and monetary conditions of the economy.
Informal auctions are held over the telephone only with the dealers.
Decree No. 3088 of June 21, 1999.
The IPCA survey is made in nine metropolitan areas (Rio de Janeiro, São Paulo, Porto Alegre, Belo Horizonte, Recife, Belem, Fortaleza, Salvador and Curitiba), plus the city of Goiania and the Federal District. It covers families with income between 1 and 40 minimum wages. It is thus considered the broadest consumer price index available, both in geographic terms and in coverage of income ranges.