Asymmetries of the Brazilian states’ responses to shocks in monetary and exchange rate policies: an assessment using a FAVAR model

Abstract In this paper, we analyze whether the Brazilian states constitute an optimal monetary area by examining the possible asymmetries in the states’ responses to shocks in monetary and exchange policy, in addition to comparing the states’ responses to common and idiosyncratic shocks. The methodology initially developed by Lima et al. (2018) is used to estimate Factor-Augmented Vector Autoregressive (FAVAR) models that incorporates the Gibbs sampling, proposed by Wagoner and Zha (2003) to identify structural vector autoregressive (SVAR) through sign restrictions in the impulse response functions to the Gibbs sampling developed by Bernanke and Boivin (2003) to estimate FAVAR models. The model allows us to identify asymmetries in the responses of the growth economic rates and of the inflation of the Brazilian states to the shocks in the monetary policy and the exchange rate, besides estimating the relative importance of the responses of the states’ economic growth to the common and specific shocks.