Effectiveness of Monetary Transmission Mechanism Under Confidence And Uncertainty: Evidence From Brazil

Abstract

The influence of the monetary transmission mechanism on the economy is largely seen by economists as a ‘‘black box’’. The study evaluates the effectiveness of the monetary transmission mechanism in the case of uncertainty for a highly volatile nation like Brazil. The study aims to understand the characteristics of uncertainty in the economy and measure its influence on the monetary transmission channel of Brazil through the Structural Vector Autoregressive Model. To capture the level of uncertainty prevailing in the economy we use the economic policy uncertainty index and evaluate its influence on the call money rate, real gross domestic product and consumer price index of the Brazilian economy. The results of the study indicate that uncertainty shock resembles an aggregate supply shock and the monetary transmission mechanism is impeded when uncertainty is taken into account. Further, the study finds that the Brazilian economy aligns with the wait and watch perspective of uncertainty suggesting the critical role timely information can play in the economy. For future research, the study can be extended to assess whether Brazil's uncertainty has a spillover effect on the monetary transmission mechanism of its major trading partners.