Understanding Price Formation Through Inflation Expectations: A Brazilian Perspective on the Phillips Curve

Abstract

This study revisits the Phillips curve to examine its relevance in the Brazilian economy from 2003 to 2019. Using restrictive VAR and identified SVAR models, it finds that expectations about future economic conditions have a negative and significant impact on the inflation-unemployment relationship. The analysis detects strong non-linearity via Chow’s test, supporting the use of quantile regression. This methodological approach reveals that policy decisions based on average estimates may miss important features of inflation dynamics, especially during volatile periods. Results show that inflation inertia remains a major challenge in Brazil, especially amid structural and external shocks. Observed non-linearities highlight the need for more nuanced and distribution-sensitive strategies for inflation targeting, particularly during times of economic instability. Overall, the findings suggest that adopting flexible approaches is crucial for effective monetary policy in Brazil’s evolving economic context.