Sailing through the Global Financial Storm: Brazil’s recent experience with monetary and macroprudential policies to lean against the financial cycle and deal with systemic risks

The global financial crisis of 2008–12 prompted a renewal of both analytical thinking and policy practices regarding the interaction and mutual comple­ mentarity between monetary and prudential regulatory policies, given the simul­ taneous objectives of macroeconomic and financial stability. Many of these issues were present before the global financial crisis but have been thoroughly revisited since, essentially because: (1) overwhelming evidence showed that macro financial linkages allowed for the buildup of significant finan­ cial risk in an environment of macroeconomic stability without adequate regula­ tion; (2) analysts realized that the cost of mopping up after crises such as that of 2008 is extraordinarily high, suggesting that prevention is preferred to remedies; and (3) destabilizing side effects resulted from the unprecedented injections of global liquidity by monetary authorities of advanced economies, exacerbating sudden floods of capital into emerging economies. Going back to where it began, by the end of the 1990s and early 2000s the world economy was enjoying the so­called great moderation, partly due to the progressive—and successful—adoption by central banks of flexible inflation­ targeting monetary policy framework. The perceived attraction of inflation