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This paper explores the nexus between the financial cycle and business cycle in Brazil. Cycles are estimated using a variety of commonly-used statistical methods and with a small, semistructural model of the Brazilian economy. An advantage of using the model-based approach is that financial and business cycles can be jointly estimated, allowing information from all key economic relationships to be used in a consistent way. The results show that Brazil is now in the downturn phase of the financial cycle. Moreover, the results underscore the importance of macro-financial linkages and highlight risks to the recovery going forward.

Brazil --- Economic conditions. --- Economic policy. --- Banks and Banking --- Macroeconomics --- Money and Monetary Policy --- Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data) --- Financial Markets and the Macroeconomy --- General Financial Markets: General (includes Measurement and Data) --- Financial Institutions and Services: General --- Monetary Policy, Central Banking, and the Supply of Money and Credit: General --- Business Fluctuations --- Cycles --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- Monetary economics --- Economic growth --- Banking --- Credit --- Financial cycles --- Business cycles --- Credit cycles --- State-owned banks --- Money --- Financial sector policy and analysis --- Financial institutions --- Banks and banking

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Macro-feedback effects have been identified as a key missing element for more effective macro-prudential stress testing. To fill this gap, this paper develops a framework that facilitates the analysis of both the direct effects of macroeconomic shocks on the solvency of individual banks and feedback effects that allow for the amplification and propagation of shocks that can result from bank deleveraging and credit crunches. The framework ensures consistency in the key relationships between macroeconomic and financial variables, and banks’ balance sheets. This is accomplished by embedding a standard stress-testing framework based on individual banks’ data in a semi-structural macroeconomic model. The framework has numerous applications that can strengthen stress testing and macro financial analysis. Moreover, it provides an avenue for many extensions that address the challenges of incorporating other second-round effects important for comprehensive systemic risk analysis, such as interactions between solvency, liquidity and contagion risks. To this end, the paper presents some preliminary simulations of feedback effects arising from the link between the liquidity and solvency risk.

Economic forecasting. --- Economics --- Forecasting --- Economic indicators --- Banks and Banking --- Finance: General --- Macroeconomics --- Money and Monetary Policy --- Banks --- Depository Institutions --- Micro Finance Institutions --- Mortgages --- Prices, Business Fluctuations, and Cycles: Forecasting and Simulation --- Financial Markets and the Macroeconomy --- Money Supply --- Credit --- Money Multipliers --- Financial Forecasting and Simulation --- Monetary Policy, Central Banking, and the Supply of Money and Credit: General --- Financial Institutions and Services: Government Policy and Regulation --- Personal Income, Wealth, and Their Distributions --- Aggregate Factor Income Distribution --- Monetary economics --- Financial services law & regulation --- Banking --- Finance --- Capital adequacy requirements --- Personal income --- Stress testing --- Money --- Financial regulation and supervision --- National accounts --- Financial sector policy and analysis --- Countercyclical capital buffers --- Income --- Asset requirements --- Banks and banking --- Financial risk management --- Brazil

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This paper assesses the costs of internal trade barriers and proposes policies to improve internal trade. Estimates suggest that complete liberalization of internal trade in goods can increase GDP per capita by about 4 percent and reallocate employment towards provinces that experience large productivity gains from trade. The positive impact highlights the need for federal, provincial and territorial governments to work together to reduce internal trade barriers. There is significant scope to build on the new Canadian Free Trade Agreement to more explicitly identify key trade restrictions, resolve differences, and agree on cooperative solutions.

Canada --- Commerce. --- Exports and Imports --- Labor --- Trade Policy --- International Trade Organizations --- Empirical Studies of Trade --- Employment --- Unemployment --- Wages --- Intergenerational Income Distribution --- Aggregate Human Capital --- Aggregate Labor Productivity --- International economics --- Labour --- income economics --- Trade barriers --- Trade agreements --- Trade liberalization --- Trade balance --- International trade --- Commercial policy --- Commercial treaties --- Balance of trade --- Economic theory