TITLE:
Brazil’s Monetary Policy Transmission Puzzle
AUTHORS:
Elder M. Silva, Marian Salles Gomes Bellamy, Ricardo Augusto Bonfim M. da Rosa, Arthur Baptista Feijo
KEYWORDS:
Monetary Policy Transmission, Financial Incentives, Monetary Transmission in Brazil, Balance Sheet Channel
JOURNAL NAME:
Open Access Library Journal,
Vol.12 No.12,
December
3,
2025
ABSTRACT: This paper examines the structural distortions introduced by the widespread use of post-fixed bonds in Brazil’s monetary policy framework. Unlike other economies where monetary tightening adversely affects banks’ balance sheets, Brazil’s financial institutions often benefit from such policies due to their exposure to post-fixed instruments. This creates perverse incentives that undermine the effectiveness of monetary policy transmission. Using the concept of Evolutionarily Stable Strategies, we argue that the current equilibrium is suboptimal and self-reinforcing.