Taylor rule estimations for Brazil, principal components of commoditiy indices and forecasts for the 2002-2015 period

Abstract

This paper aims to estimate a reaction function of the Central Bank of Brazil (BCB) in order to check whether the estimated reaction function is sensitive to the inclusion of the information content of commodity indices. In particular, we verify whether the inclusion of common factors contained in commodity price indices improve the adjustment of the response function, based on in-sample and out-of-sample forecasts. Our estimates show that the inclusion of information contained in the real exchange rate and commodity price indices may in fact improve the adjustment of the Brazilian Central Bank’s reaction function, probably due to the vulnerability of country to external shocks during the period analyzed.