Appendix
The model used in the simulation exercises to obtain the impulse responses to supply,
demand and Embi spread shocks is made of the following equations:
Embi Spread equation
Embit = μo + μ1Embit-1 + μ2Bt-ιit-ι + μ3SpBaat + μ4DU + Vemba (1)
where Embit is the Embi spread, SpBaa is the US Corporate bond spread and DU
is a dummy variable taking the value of 1 for the crisis period 2002:06 -2002:12.
Exchange rate equation
et = δ0 + δ1et-1 + δ2 (it-1 - itU-S1)+δ3Embit + δ4∆Embit + vet (2)
where iUS is the US federal funds rate.
Output gap equation
yt = γ0 + γ1yt-1 + γ2yt-2 + γ3it-6 + γ4Embit-1 + vyt (3)
Inflation equation
πt = α0 + α1πt-1 + α2yt-1 + α3(et-6 - et-12) + α4Σi4=1Embit-i + vπt (4)
Selic rate equation
it = ρit-1 +(1- ρ)[β0 + β1 (πt-1 - πT ) + β2∆et-4] + vit (5)
where πT is the inflation target.
The inflation rate, the interest rates, the spreads and the output gap are monthly
and have not been multiplied by 100. The exchange rate et is the logarithm of the
$Real/US-dollar exchange rate. An Embi spread shock is a one standard deviation
shock to equation (1), a demand shock is a one standard deviation shock to equation
(3) and a supply shock is a one standard deviation shock to equation (4).
The model is estimated by Iterative Least Squares.