Monetary policy autonomy and foreign reserves accumulation in Brazil: a compensation view.

This article examines the relationship between monetary policy autonomy and exchange rate regimes in Brazil during the 2000s, focusing on the Central Bank of Brazil's substantial accumulation of foreign reserves through foreign exchange market interventions. It challenges mainstream views based on the Mundell–Fleming framework, the "trilemma," and the more recent "dilemma" by applying the compensation principle, which derives from the endogenous money approach and posits that foreign reserves accumulation does not constrain the Central Bank's ability to set interest rates nor affect the monetary base. Empirical analysis using a vector error-correction model (VECM) for 2004–2011 finds that foreign reserves had no long-term effect on the monetary base but significantly influenced the Central Bank's repurchase agreements (repos) account, supporting the compensation principle. The findings suggest that Brazil maintained greater monetary policy autonomy during this period than conventional theories would predict, with sterilisation occurring primarily through repos rather than changes in the monetary base.