New model reveals how international shocks impact small economies like Brazil.
The researchers developed a model to analyze how a small open economy like Brazil can be affected by international monetary policy shocks. They used Brazilian data and a Bayesian approach to estimate the model and study the effects of structural shocks over time. The model includes the terms of trade directly in the inflation equation, which differs from closed economies. By considering the small open economy as a limit case of a two-country model, they preserved the impact of foreign variables on the domestic economy.