Inflation persistence and the rational expectation hypothesis in an open economy model: an empirical evidence for the brazilian economy

Resumen

This paper aims at testing the validity of the inflation stickiness and the Rational Expectation Hypothesis in the context of the Blanchard and Kahn (1980) approach, for the Brazilian economy, during the period from 1994 to 2003. Using the Fuhrer-Moore model and GMM, we find evidence favoring both hypotheses. We also find evidence, from the demand equation, that the recessive effect due to the increase in the real interest rate is smaller than the expansive effect due to the devaluation of the domestic currency. From the supply equation, we find that the trade-off between unemployment and inflation holds while the passthrough effect shows low influence on the inflation rate.