Research On Brazil's Financial Stability From The Perspective Of Inflation Targeting

From the Latin American debt crisis in the 1980 s to the Mexican financial crisis in the 1990 s,the Brazilian financial crisis to the Argentine financial crisis at the beginning of the 21 st century,it can be said that the Latin American region has been the hardest hit by the financial crisis and Brazil,as a large Latin American country,has also been facing problems caused by the instability of the financial system.On July 1,1999,Brazil announced the formal use of inflation targeting.The primary objective of the central bank of Brazil's monetary policy has been to maintain price stability.In order to achieve this monetary policy objective,the central bank has used interest rates as a policy tool,which has had an impact on price stability as well as on the functioning of the financial system and,consequently,on Brazil's financial stability.This paper studies the impact of monetary policy on financial stability in Brazil under the framework of inflation targeting since the global financial crisis in 2008: the paper first analyses the correlation between monetary policy and financial stability as a theoretical basis for the study;then,taking into account the characteristics of the Brazilian financial system,it constructs a system of financial stability indicators based on financial stability theory and uses relevant data to obtain a financial stability index.The thesis then takes into account the characteristics of the Brazilian financial system,constructs a system of financial stability indicators based on financial stability theory,and uses relevant data to obtain a financial stability index to assess the state of financial stability in Brazil;again,starting from the implementation of the inflation targeting system in Brazil,it chooses to use the interest rate,inflation rate and financial stability index as variables,and uses a time-varying parametric vector autoregressive model(TVP-VAR model)to analyze the impact of monetary policy objectives and instruments on financial stability in Brazil;finally,it further analyses the macroprudential policies adopted by the Brazilian central bank with the objective of financial stability and their coordination with monetary policy.The findings of the study are as follows.Firstly,Brazil undertook a series of financial reforms in the 1960 s and 1990 s,which contributed to the development of its financial system.The existing financial system in Brazil consists of a regulated system and an operational system,forming an organic whole with commercial financial institutions as the mainstay,supplemented by policy-based financial institutions.With the accelerated opening up of the Brazilian financial sector,foreign banks have entered the country through mergers and acquisitions,and the banking sector has emerged as the core part of the Brazilian financial system,with state-owned banks,domestic private banks and foreign banks co-existing.The Brazilian securities market has achieved relatively rapid development,with increased market depth and liquidity,but still faces development challenges.The central bank of Brazil has assumed a very important role in the formulation and implementation of both monetary and foreign exchange policies.Second,the movement of the Brazilian Financial Stability Index shows a generally volatile upward trend from Q1 2008 to Q3 2021,indicating a more pronounced improvement in the country's financial stability during this period.During the three worldwide risk events the 2008 global financial crisis,the 2010 European debt crisis and the 2020 coronavirus disease epidemic and the 2015-2016 domestic recession,the Brazilian Financial Stability Index experienced a phased decline,indicating that there is still some vulnerability in the Brazilian financial system in the face of shocks.Thirdly,Brazil implements an inflation targeting system to maintain real inflation within a pre-set inflation target band by adjusting the SELIC interest rate to achieve the monetary policy objective of maintaining price stability.Combining the characteristics of monetary policy in Brazil,the thesis selects the financial stability index,the SELIC interest rate and the inflation rate as variables and uses a TVP-VAR model to analyze the impact of monetary policy on financial stability.From the results of the analysis,both an increase in the interest rate and the inflation rate led to a decrease in the level of financial stability,suggesting that a high inflation rate will have a negative impact on financial stability and that it is beneficial to maintain financial stability if the inflation level can be effectively controlled.Although higher interest rates can have a negative impact on financial stability,tighter monetary policy to control inflation is still generally beneficial to maintaining financial stability.Brazil has adopted an inflation targeting regime that does not include financial stability as a policy objective,but maintaining price stability is still conducive to maintaining financial stability.The impact of interest rates and inflation rates on financial stability varies at different time intervals due to different pathways of impact.There are also differences in the response of financial stability to monetary policy at different points in time(corresponding to different risk events),and the reasons for the differences are related to the prevailing financial environment.Fourth,effective macro-prudential policies are an important safeguard for maintaining financial stability in Brazil.Especially in the case of high inflation rates,the central bank may adopt monetary policies that raise interest rates in order to achieve the set inflation target,which may have a negative impact on financial stability,when macroprudential policies become an important pillar to maintain financial stability.In Brazil's practice,monetary policy is focused on the objective of achieving price stability,and the use of macroprudential policies to mitigate shocks to the financial system arising from the implementation of monetary policy can better preserve financial stability.