Monetary Policy and Exchange Rate: Effects on Disaggregated Prices in a FAVAR Model for Brazil

This paper investigates the effects of monetary and exchange rate shocks on disaggregated prices of the Brazilian Consumer Price Index (IPCA), from 1999 to 2011, using a factor-augmented vector autoregressive model (FAVAR). We estimate the model with Bayesian techniques, and construct impulse-response functions using sign restrictions over the responses of macroeconomic variables. The main results are: a) taking into account the weights, 50% of the rates of price change at the sub-items level fell after a monetary shock and 40% rose after exchange rate's shock; b) only 0.3% of the sub-items showed price puzzle for monetary shocks and 4.7% for exchange rate shocks; c) macroeconomic shocks are more persistent than series-specific shocks; d) for the sub-itens, series-specific shocks are the main determinants of the variance, but macro shocks are more influent over aggregated series e) the answers are different according to the sector considered.