Dear friends,
Inflation must be interpreted as constant and widespread price change. In this respect, for the simple reason that inflation is a monetary phenomenon, government is the one to be held accountable for it is the sole producer of money (currency and credit). Obviously, there is no shortage of versions of this thesis, let alone the causalities it entails. Supply and demand shocks are recurrent topics of study; they “explain and prove” theses, and are always invoked for a “better” understanding and correct choice of instruments to control inflation. Regulating the money supply, in its various forms, means expanding or contracting the means of payment, thus curbing inflation.
Such control, in much of the world and here in Brazil, is carried out by Central Banks (CBs) through its monetary policy apparatus. Among the “various” instruments that the monetary authority has in its toolbox, the basic interest rate of the economy – the Selic – is the preferred one. Once defined by COPOM, BACEN operates in the government bonds market so that the effective Selic rate converges to the target set by the Committee. Thus, the system’s liquidity is increased or decreased, affecting all interest rates in the country, while influencing expectations. In this sense, it is a powerful mechanism, since in the long run the determinant for duration and persistence (pressure) of inflation are expectations (of inflation). BACEN, therefore, “rules the roost” for good or for bad.
