Nonlinearities and price puzzle in Brazil

Abstract

What is called a price puzzle is a positive and persistent response of in ation to a unit shock in the interest rate's innovation. Using a VAR to analyse monetary policy in Brazil, this paper comes to the conclusion that when nonlinearities in the data were considered, most of this e ect vanishes. This is done rstly by checking if the series are unit root processes or nonlinear trend stationary. After that a nonparametric co-trending analysis was applied. The test result favored a common nonlinear trend between in ation and the interest rate, which seems to a ect the system innovation analysis, inducing most of the price puzzle e ect.