Cash transfers and the Phillips curve: The case of Brazil during the pandemic

This paper investigates the linear and nonlinear effects of the pandemic period on the dynamics of the Brazilian inflation through the estimation of a hybrid Phillips curve. Despite the undisputed socio-economic benefits, cash transfers paid by the government to low-income families increased inflation, with an estimated coefficient similar in magnitude to the output gap. The backward-looking component decreased while the forward-looking component increased sharply, suggesting a shift in the price-setting behavior toward anticipating fluctuations in the business cycle. There was also a significant reduction in the flatness of the Phillips curve, as the output gap coefficient more than doubled during this period. These findings might be explained by the unprecedented combination of sectorial increases in demand, a decrease in aggregate supply, anticipated money supply growth, and loose monetary policy. They unveil an undesired side effect of cash transfers on inflation that adversely affected the purchase power of the program beneficiaries.