Aloisio Araújo is interviewed by Valor Econômico.
Aloisio Araújo
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Economist and emeritus researcher at IMPA, Aloisio Araújo, was interviewed by the newspaper Valor Econômico. The report, titled “Central Bank should target the upper part of the inflation target,” was published in Tuesday’s edition (28). According to Araújo, the Central Bank should use the flexibility of the target tolerance range to temporarily accommodate higher inflation, exceeding the 3% target set by the National Monetary Council (CMN). The economist’s arguments are based on the article “Inflation Targeting Under Fiscal Fragility,” co-authored with other researchers and recently accepted for publication in the American Economic Journal: Macroeconomics, one of the most important international macroeconomics journals. “This model is, in a sense, a critique of monetarists, who believe that the interest rate solves everything. And also, in a way, of the first inflation targeting models, which weren't wrong, but were designed for developed countries, where there is so-called monetary dominance. That is, you set the inflation target and coordinate expectations to achieve it. I think this view is incomplete, especially in countries like Brazil.” Read more: IMPA has an open position for IT Specialist 3 'IMPA Summer' brings together more than 400 participants Folha: 'You didn't expect this!' In another part of the interview, Araújo explains why, in his opinion, the model doesn't work for Brazil. “In simplified terms, there were two situations regarding the relationship between public debt and GDP, obviously taking into account the specific characteristics of each country. When the debt-to-GDP ratio is low for that country, you have monetary dominance. The government sets the inflation target in order to minimize inflation, because inflation is a bad thing. On the other hand, you have fiscal dominance. In this situation, nothing else matters, the Central Bank loses control [over inflation]. The novelty we present [in the article] is that there is an intermediate zone of fiscal fragility, which is particularly important for emerging countries. If the country finds itself in this zone of fragility, when a bad shock occurs, such as the 2008 global financial crisis or the pandemic, it may find itself in a situation where it cannot meet the inflation target,” he said. When questioned about the paths the Central Bank can take in the face of a continuous inflation target of 3%, Araújo defended strengthening the fiscal framework. “Some measures that have already been announced by the government are very good. The super-salary, for example. Isn't it defined that there is a salary cap? How do some people earn above it? It is necessary to stop hiring employees and not grant salary increases. But I think we shouldn't rigidly follow the center of the [inflation] target; I think that's impossible. The continuous target is a good idea. We should reach, as quickly as possible, next year, or at some point, the upper part of the target.” Check out the full interview here . Exclusive content for Valor Econômico subscribers. Also read: IMPA inaugurates showcase of awards and accolades IMPA Tech announces list of those qualified for the 2nd phase