In line with much of the literature on RMP, interest rate effects on regional activity were primarily negative due to the contractionary monetary policy prevailing throughout most of the analyzed period, which broadly affected states in all regions. The greatest intensities were observed in states of regions with lower degrees of economic development such as the Northeast and North (Bertanha; Haddad, 2008), while the least negatively affected states are in the Southeast and South, which are more economically developed.

The impacts of interest rate shocks support the notion of differential incidence and suggest that regions with higher liquidity preferences, referred to here as peripheral, were the most affected due to lower levels of banking development. These findings emphasize that peripheral states experienced more intense reactions to restrictive monetary policy shocks, reflecting their economic fragility. Such intensity influences investment expectations and the performance of the banking (and broader financial) system in these regions, impeding economic growth and exacerbating disparities and instabilities relative to the central regions (Dow, 1987; Rodríguez-Fuentes, 2006; Silva, 2011; Diniz, 2017).

The states of Acre and Roraima (North) and Alagoas and Bahia (Northeast) showed positive employment impacts following the shock, as detailed in Appendix B. These effects might stem from sectoral characteristics, such as industries less sensitive or slower to react to interest rate changes, or from the expansion of the Brazilian economy, which boosted formal job creation until around 2013, mitigating the effects of monetary policy. Alternatively, these positive impacts could be linked to a shift in economic policy conservatism associated with the New Macroeconomic Matrix (NMM), which led to a period of declining Selic rates (2011-2013). Although still high, this decline might have stimulated regional economies through reduced credit costs⁶, for example, addressing both external and internal economic challenges while using interest rates as the primary monetary policy tool for inflation control (Nassif, 2015; Barbosa Filho, 2018).

With the onset of macroeconomic adjustments in 2015, the scenario shifted to one of policy exhaustion, deteriorating public accounts, reduced consumption and investment, sharp declines in commodity prices and international trade, and a political and institutional crisis, driven by a combination of internal and external factors. This period is also associated with the Brazilian economy’s expansion, driven by increased income transfers to low-income individuals and the elderly, wage adjustments for workers and civil service sectors, and favorable international economic conditions⁷. In early 2016, a new external shock, caused by another drop in commodity prices, contributed negatively to the country (Barbosa Filho, 2018; Lélis; Cunha; Linck, 2019; Villaverde; Rego, 2019). This scenario may have further hindered positive employment outcomes, particularly penalizing peripheral states with the reversal of interest rate declines, leading to levels surpassing those experienced during the international financial crisis.

It can be argued that using interest rates as the primary monetary policy instrument has revealed heterogeneous responses in terms of intensity and duration across Brazilian states, with the most severe reactions occurring in peripheral areas. The actions of the Central Bank of Brazil have had detrimental effects on the development of these peripheral regions, with contractionary effects anticipated due to the Inflation Targeting Regime (ITR) and persistently high interest rates for most of the evaluated period (until May 2017). This underscores the importance of understanding the structural and behavioural dynamics of state economies for the formulation and implementation of effective policies, especially in avoiding the perpetuation of economic disparities that further disadvantage peripheral states.

The impacts of inflation were predominantly negative on regional activity, as detailed in Appendix B. According to Modenesi and Ferrari Filho (2011), Brazilian inflationary dynamics do not exhibit a strong relationship with domestic economic activity. Instead, the factors influencing these dynamics are associated with cyclical issues, costs (eg.: commodity prices), and structural factors, due to the inflationary inertia and historical roots of the Brazilian economy, rendering it a phenomenon influenced by both demand and supply. Barbosa Filho (2015) explains that even after the adoption of the floating exchange rate regime in 1999, monetary policy remains significantly affected by the high correlation between exchange rate fluctuations and inflation control, necessitating increased interest rates in response to exchange rate hikes.

The positive outcomes observed in states within peripheral regions align with the findings from the interest rate shock analysis, considering both external and internal conjunctural conditions. The tendency for interest rates to decline, including efforts by the NMM, despite remaining high, may have yielded beneficial effects in Acre and Alagoas, mitigating the negative impacts of interest rates in these states. Recognizing interest rates as the primary monetary policy instrument in Brazil, and their regional effects, combined with an appreciating exchange rate for most of the period, may have impaired the competitiveness and production of the national tradable goods industry. However, the exchange rate also contributed to inflation control (Nassif, 2015; Diniz, 2017; Villaverde; Rego, 2019). Furthermore, the positive impact of rising commodity prices, which benefited primarily exporting states, might have created a “buffering effect,” as noted by Stockl, Moreira, and Giuberti (2017, p. 178), by allowing these states to pass on cost increases to final goods.

This understanding is related to the market structure of regional economies, which affects firms’ financial costs and their ability to transfer these costs to prices. Central regions are more likely to be oligopolistic, whereas peripheral regions are more competitive. The former have greater capacity to pass on cost variations to prices, while the latter, due to their market structure, are less able to do so, making them more vulnerable and negatively impacted (Chick; Dow, 1988; Amado, 1998). Consequently, the industrial pattern and configuration reinforce the dominance of central regions over peripheral ones, as regional behaviour is influenced by the actions of the “headquarters agency” (Figueiredo; Crocco, 2012, p. 498), given the banking concentration within Brazil’s national financial system, where branch agencies are located in peripheral regions and headquarters in central ones. Consequently, they would be held hostage by the economic cycles for their availability of regional credit, due to the liquidity preference in the central regions.

In general, the results seem to reveal that the states of central regions, specifically the Southeast and the South, possess more developed institutional and economic frameworks to absorb and mitigate the negative effects of inflation. This is evident through structural and behavioural factors linked to their industrial and banking sectors, which demonstrate higher levels of economic and financial development, reduced uncertainty, and lower liquidity preferences. Thus, the Central Bank of Brazil’s national-level inflation control measures demonstrated adverse and asymmetric regional effects, particularly affecting less economically developed states in peripheral regions.

The exchange rate effects were also largely negative on regional activity, with the states of the Northeast and North being the most affected (see Appendix B). The causes of inflation are both supply and demand related. There is a high correlation between the exchange rate and inflation, even after the adoption of the floating exchange rate regime; since the exchange rate continues to play a significant role in controlling inflation (Modenesi; Ferrari Filho, 2011; Barbosa Filho, 2015). The shock in costs caused by rising commodity prices, which occurred during the studied period, had notable effects on the Brazilian economy. This shock influenced the exchange rate and, consequently, affected employment in various states.

Periods of exchange rate appreciation combined with high interest rates tend to discourage production and weaken the competitiveness of the domestic tradable goods sector. These conditions also impact the productive structure and the balance of payments, particularly through the export basket, which stimulates imports despite benefiting from international prices (Nassif, 2015; Diniz, 2017; Stockl; Moreira; Giuberti, 2017). Even though there were periods of currency devaluation and declines in commodity prices (such as in September 2008 during the international financial crisis), the predominant combination of exchange rate appreciation and rising commodity prices appears to have had a greater relative impact during this period compared to the reverse scenario.

Villaverde and Rego (2019) explain that the commodity boom, which began in 2004 and continued until 2011, led to higher prices for primary goods like soy and iron ore, resulting in increased dollar flows to the Brazilian economy. Despite exchange rate appreciation, exporters of these commodities were significantly favored and did not experience negative profit pressures from exchange rate fluctuations⁸. From 2014 onward, the country experienced a downturn compared to the expansionary years of 2004-2013. Commodity prices began to decline sharply between mid-2014 and mid-2016, while the global economy and trade were also slowing down (Barbosa Filho, 2018; Lélis; Cunha; Linck, 2019).

In addition to sharp exchange rate devaluations, Brazil experienced post-financial crisis policy exhaustion, which led to deteriorating public accounts and reduced consumption and investment. As argued by the authors, Brazil’s regressive specialization and extensive financial opening, resulting from deindustrialization and reliance on international trade in natural resources, left it vulnerable to financial cycles and commodity price fluctuations. This context reinforces the country’s fragility and highlights the need to interpret both conjunctural and structural factors, both domestic and external, to understand the dynamics of the Brazilian economy.

For such reasons, the combination of these results suggests that states with a significant export profile, such as Bahia and Pará, experienced attenuated negative effects due to the export effect, similar to states in the Southeast and South regions (Silva, 2011), as shown in Appendix B. Conversely, states with a heavy reliance on imports or those predominantly importers, indicating their dependence on central regions, such as those in the Northeast and North, were more negatively impacted. This highlighThis supports the viewts the disincentives to production and the loss of competitiveness faced by these states in the domestic market.

Even though the exchange rate has been used to control inflation in a sense of “buffering effect” and using interest as the main instrument of monetary policy, when realising its regional effects, it is evident that this combination of instruments to combat inflation in the moulds of the ITR has had detrimental effects on Brazilian states, with an emphasis on the least developed ones. Consistent with the inflation analysis described herein, the market configuration and banking system of both the centre (oligopolistic and “headquarters agencies”) and the peripheries (competitive and branch agencies) underscore the vulnerabilities of these locations. They are not only subject to economic cycles and dependence on central regions but also affected by the performance of national monetary policy and external sector dynamics, resulting in differentiated impacts on states in terms of regional structure and behaviour.

The impacts of the asset price channel on employment, represented by a measure of Tobin’s q, exhibited only two response patterns, both showing generalized negative effects on regional activity (see Appendix B). The first pattern observed included representation from all regions, with the smallest regional negative responses. Notably, this pattern includes all states from the Midwest and South regions. In the second pattern, states in the Northeast, North, and Southeast generally displayed negative responses between the fifth and eighth periods, in contrast to the positive responses observed in earlier periods. In terms of intensity, within the group of the most affected states, those in the Northeast and North were particularly notable.

Industrial concentration can result from banking concentration, as peripheral regions often host industrial branches linked to national bank branches. This setup demonstrates an advantage for national banks over regional ones, leading to the transfer of reserves to central regions and reinforcing national banking concentration. Consequently, financial availability in peripheral regions could be compromised relative to central regions, reinforcing the dominance of the center over the periphery (Chick; Dow, 1988; Amado, 1998). Additionally, while peripheral regions might capture positive spillover effects from policies implemented in central regions (Silva, 2011; Diniz, 2017), these effects are less pronounced due to their structural and behavioural characteristics, which make them more susceptible to the impacts of contractionary policies. Due to this dynamic, the centrality characteristic can mitigate the effects of monetary policy, contributing, once again, to maintaining the dominance of the centre over the periphery by affecting the liquidity preference of the agents of that region, perpetuating the regional economic inequalities among them (Dow, 1987).

Peripheral regions often face greater uncertainty, instability, and fragility, along with lower levels of economic and financial development. Monetary policy can influence the composition of savers’ portfolios through behavioural effects. Investors may favor safer and more liquid assets, leading to a migration of financial resources to central regions, which offer greater security, liquidity, and asset diversification. This scenario tends to increase asset values in central regions. Given Brazil’s predominantly national financial system, regional agencies are influenced by the liquidity preference of central agencies, which allocate resources to less uncertain regions (Chick; Dow, 1988; Rodríguez-Fuentes, 2006; Figueiredo; Crocco, 2012).

The “functional distance”⁹, to central regions can cause less developed or peripheral regions to increase their liquidity preference, negatively impacting local credit. As a consequence, the agencies of the central regions would determine the form of asset allocation, being passed on to their branches, diverting them to the more developed regions. The peripheral regions act as intermediaries in financial allocation, sustaining low levels of economic development, high uncertainty, and limited local credit (Cavalcante; Crocco; Jayme Jr., 2006).

The states most negatively affected were those farther from the financial center, characterized by greater distances, lower levels of development, higher uncertainty, and liquidity preference, such as those in the Northeast and North regions (see Appendix B). Thus, considering the cost of local capital as a locational decision factor for firms, central regions in a national financial system could reinforce their dominance relative to peripheral regions, perpetuating regional financial inequalities through asset concentration and displacement, which impacts local credit and investment and hinders growth and development (Amado, 1998; Figueiredo; Crocco, 2012).

In the sense of seeking to incorporate the interrelations of this shock with the previous ones, especially interest and exchange rates, it is possible to raise the hypothesis that for the period studied, the combination of the effects of the commodity boom, the exchange rate appreciation, the high levels of interest rate and, as a consequence, the entry of foreign capital into the country, leading to speculative behaviour in the Brazilian capital market, particularly in shareholder capital seeking short-term gains from interest rate differentials, which reinforces regional disparities and hinders growth and development in peripheral regions (Nassif, 2015).

This hypothesis gains theoretical support when considering that, following the Lehman Brothers’ bankruptcy, global investors exhibited heightened risk aversion, leading to a broad flight to quality and significant devaluation of the national currency (Freitas, 2009). In response, the Brazilian government raised interest rates, reversing earlier reductions made as an anti-cyclical measure during the financial crisis (Barbosa Filho, 2018). By not regulating capital flows, a measure that could prevent speculative capital entry and support long-term financing for productive investments, the market did not contribute to job creation and economic development. Even if the spillover effect were small (or perhaps negative) for peripheral regions, the general results indicate the (non) capacity of this channel to generate jobs for the period considered, having little effect on the “real side” of the economy when perceiving the very discreet and non-permanent positive regional responses.

The impacts of regional credit on employment have produced varying results across states, both positive and negative, as detailed in Appendix B. Among the states showing the highest positive magnitudes, only those in the Northeast and North regions were identified. In terms of the negative intensities, the greatest effects were seen in the North and Southeast of Brazil. From 2014 onwards, a decline in the volume of state credit can be observed, explained by reduced credit concessions, such as the expansion of disbursements by the Brazilian Development Bank (BNDES) and the increase in reserve requirements (Diniz, 2017; Barbosa Filho, 2018).

Greater credit instability in peripheral regions can be attributed to both structural factors, such as less economic diversification and development, greater dependence on economic cycles, product growth rates, and expectations (Rodríguez-Fuentes, 2006), and behavioral factors, including the development of the banking system and the liquidity preference of banks and the public, which influence the supply and demand for credit (Dow and Rodríguez-Fuentes, 1997). Consequently, these regions may exhibit more unstable credit availability patterns compared to central regions, with credit contracting during economic downturns and expanding during periods of growth, reflecting their higher dependence on economic cycles (Chick; Dow, 1988).

Brazil’s bank-based financial development model may exacerbate these conditions. As previously discussed in relation to asset prices, the Brazilian financial system’s structure could reinforce this scenario. The dependence of peripheral region bank branches on the behaviour of central branches may sustain low levels of economic development by reducing credit availability in times of high uncertainty (Cavalcante; Crocco; Jayme Jr., 2006; Figueiredo; Crocco, 2012).

The lower intensities observed in the states of central regions may be associated with higher levels of banking development, causing them to carry out off-balance-sheet operations by means of the management of liabilities due to financial innovations; thus, credit expansion would be carried out through credit derivatives and new over-the-counter securities, making operations more profitable (Chick, 1993b; Farhi; Prates, 2018). Hence, there would be a competitive advantage for these banks, compared to those based in peripheral regions, in their ability to create credit due to bank development.

In this context, while the direct control of the economy’s money stock by monetary authorities may be constrained by banks’ balance sheet management and financial innovations, this does not imply that monetary policy is ineffective. Prudential regulation and banking supervision are crucial for addressing the liquidity preferences of banks and borrowers. Such measures can influence behavioural factors and thus enhance the effectiveness of monetary policy in achieving economic stability (Dow; Rodríguez-Fuentes, 1997; Rodríguez-Fuentes, 2006).

Supporting this argument and considering the international financial crisis, Freitas (2009) explains that Minsky’s hypothesis of financial fragility is reinforced, increasing economic instability in this scenario. To mitigate these effects, regulations could be imposed on bank indebtedness levels, credit quality, and composition. However, as financial innovations increase, the complexity of the financial system and the relationships between creditors and debtors also evolve, underscoring the need to rethink monetary policy concepts (Chick, 1993b; Rodríguez-Fuentes, 2006; Farhi; Prates, 2018).

Since the analysis period covers most of the post-crisis period, the negative effects of an expansion of credit in the peripheral regions, beyond the high interest rates, the negative effects of inflation, and the appreciated exchange rate, in the existence of an even higher level of uncertainty in these locations due to the external situation, highlight the need for economic policy coordination (Sicsú, 2001). The interaction between these results and fiscal policy (discussed later) reveals a scenario that reinforces the fragility of peripheral regions compared to central ones. This affects agent expectations, inhibits and postpones investments, and results in a greater liquidity preference among the public and regional banks, reducing loan expansion during high uncertainty (Chick; Dow, 1988; Amado, 1998).

Emphasizing the importance of assessing the combined effects of shocks and their interrelationships, as previous highlighted in the interest rate shock, employment in states in peripheral regions that have benefited from credit expansion policies may be linked to the previously used argument of constant reductions in the Selic rate, making it possible to expand in these states by reducing their cost. However, this reasoning does not apply uniformly across all states, reinforcing the need for policymakers to understand regional dynamics. Accordingly, because of the heterogeneity of results within the same region, either due to factors linked to structure or behaviour, the performance of monetary policy in this case, in coordination with other policies, should mitigate the negative effects on peripheral regions but also observe the specific characteristics of each state. Additionally, actions should focus on addressing regional economic inequalities and creating mechanisms to protect these regions, especially during crises and periods of high uncertainty.

The impacts of the regional fiscal component revealed that at least one state exhibited a positive response (excluding the Northeast region) and a negative response (excluding the South region). Among the states that experienced the most significant benefits from the shock, only those in the North and Midwest regions were identified. Conversely, the Northeast and North peripheral regions displayed notably greater negative magnitudes compared to the previous group and other shocks, as detailed in Appendix B.

In response to the 2008 financial crisis, the federal government implemented an expansionary fiscal policy (2008-2010) to stimulate aggregate demand and mitigate the crisis’s adverse effects. This was achieved through various measures, including temporary tax exemptions like the reduction of the IPI. Additional expansionary measures were introduced in income transfer programs (Bolsa Família), housing (Minha Casa, Minha Vida), infrastructure (Programa de Aceleração do Crescimento), and BNDES disbursements (Diniz, 2017; Barbosa Filho, 2018). Furthermore, the period saw a significant inflection in economic policy with the NMM, which strongly utilized fiscal policy by increasing public spending and investments (Barbosa Filho, 2017). Consequently, these countercyclical policies may have lessened the severe impacts on regional economies, particularly peripheral ones.

However, the Northeast and North peripheral regions, characterized by low levels of economic development, were the most adversely affected during this period. These regions experienced much higher negative intensities compared to other shocks, possibly reflecting fiscal deterioration due to the exhaustion of post-crisis policies and the fiscal adjustment implemented by the federal government in 2015 (Barbosa Filho, 2018), as mentioned before, which may have contributed to a worsening of results.

When observing the effects obtained here and comparing them with those of Silva (2014) and Diniz (2017), in addition to the differences in the variables and periods considered (which are sufficient to account for differences in the results), both demonstrate the dependence of peripheral regions on coordinated economic and industrial policies for local development and growth. These policies, in turn, would aim to settle disparities and dependence on the centre, especially in periods of crisis with different regional effects, requiring some type of mechanisms to protect these locations. Otherwise, the argument of greater sensitivities in peripheral regions to the fiscal policy shock is reinforced here, as well as that the type of fiscal policy to be implemented can accentuate regional disparities, contributing to their maintenance.

Sicsú (2001) argues for the necessity of coordinating economic policies, diverging from the orthodox view that subordinates monetary policy to fiscal policy since this could undermine its effectiveness because it is linked to inflation expectations. Diniz (2017) notes that if economic agents believe that policies aimed at reducing unemployment will lead to increased inflation, it will create instability in monetary policy performance. Therefore, Sicsú (2001) emphasizes the importance of ensuring that fiscal policy is viable, credible, and supported by clear objectives and adequate tools. This helps shape financial and entrepreneurial market behaviours in the desired direction and maintains a strong reputation among policymakers.

From a regional perspective, the argument is reinforced by the fact that the states most affected by employment reductions are in the Northeast and North regions, which have low levels of economic development and high uncertainty. These regions lack robust institutions and mechanisms to buffer against economic cycles and external fragility compared to the Southeast and South regions. Thus, the need to expand the concept of monetary policy is reiterated.

Additionally, enhancing elements of prudential regulation and banking supervision is crucial, particularly through direct state intervention in the financial system, to mitigate the economic impacts of contractionary shocks while considering regional specificities (Dow, 1982; Amado, 1998; Rodríguez-Fuentes, 2006). Furthermore, it is essential for both central and state governments to coordinate monetary and fiscal policies to promote and stimulate industrial policies in peripheral regions. This requires clear guidelines and careful, reputable, and prudent state action, as the state’s performance is perceived through “private logic,” which could exacerbate regional economic disparities between central and peripheral area (Amado, 1999; Sicsú, 2001).

The impacts of the variable used to capture the effect of uncertainty on employment revealed heterogeneous results across states. There appears to be a certain “pattern” in the shape of the curves (U or V type, depending on the intensity of the shock), although there are variations in recovery times (see Appendix B). It is important to note that these data also reflect the effects of both external and internal adverse shocks, such as the international financial crisis (2007-2008), the slowdown in Chinese economic growth (2011), the national political scenario (2014), and the Brazilian economic recession (2015-2016).

Souza, Zabot, and Caetano (2019) emphasize the importance of uncertainty in interpreting and understanding economic dynamics, an area that remains underexplored. They argue that adverse shocks can diminish the effectiveness of economic policies aimed at recovery when these effects are pronounced during periods of high uncertainty. Supporting this view, Santos (2019) finds that the effectiveness of monetary policy on economic activity is greater during periods of lower uncertainty. Attempts to capture signs of uncertainty in the post-Keynesian sense reveal both agreement and disagreement. Since fundamental uncertainty cannot be estimated (Keynes, [1936]1985; Amado 2000; Rodríguez-Fuentes, 2006), there are mixed results.

Results consistent with this argument show that peripheral regions, specifically the Northeast, North, and Midwest, were the most negatively affected. When these results are compared with other shocks, the highest negative intensities are observed in these states across various shocks. These findings support the argument that these locations experience a higher level of uncertainty. Additionally, agreement is found in the observation of lower negative intensities in central regions (Southeast and South) across interest rate, exchange rate, and fiscal policy shocks. These results highlight and reinforce the heterogeneities and inequalities among states, indicating the dominance of central regions over peripheral ones.

However, some evidence does not support this argument, as states in the Northeast and North regions exhibited similar low negative responses as those in the South. Following this perspective, an increase in uncertainty was expected to generally reduce employment in states, with greater intensity in peripheral regions. Yet, results from some states in the Northeast, North, Midwest, and Southeast regions showed positive effects of this shock. Overall, this study evaluates the measurement as not being interesting in capturing uncertainty in the post-Keynesian sense. The agreement with some results supports this view, while the counterevidence does not necessarily refute the theory.