DYNAMIC STRUCTURAL MODELS AND THE HIGH INFLATION PERIOD IN BRAZIL: MODELLING THE MONETARY SYSTEM

In this paper we develop a linear structural dynamic econometric model for the high inflation period in Brasil. The maing goal is to obtain a parsimonious model that accounts for complex dynamic present in the monetary system during the period describing the relationships among output, inflation rate, interest rates and real money. We start the analysis after the Cruzado plan cast in 1986 following a progressive strategy in deriving the econometric model. The results show that we can identify a long run money demand equation and the model describes parsimoniously and in detail the relationship among the variables despite all the instability present in the second half of the 1980's in Brazil with special attention to the role played by nominal wage inflation in determining the dynamics observed in price inflation.