In this article we use the theory of conditional forecasts to develop a new MonetaryConditions Index (MCI) for Brazil and compare it to the ones constructed using themethodologies suggested by Bernanke and Mihov (1998) and Batini and Turnbull(2002). We use Sims and Zha (1999) and Waggoner and Zha (1999) approaches todevelop and compute Bayesian error bands for the MCIs.The new indicator we develop is called the Conditional Monetary Conditions Index(CMCI) and is constructed using, alternatively, Structural Vector Autoregressions(SVARs) and Forward-Looking (FL) models. The CMCI is the forecasted output gap,conditioned on observed values of the nominal interest rate (the Selic rate) and of the realexchange rate. We show that the CMCI, when compared to the MCI developed byBatini and Turnbull (2002), is a better measure of monetary policy stance because ittakes into account the endogeneity of variables involved in the analysis.The CMCI and the Bernanke and Mihov MCI (BMCI), despite conceptualdifferences, show similarities in their chronology of the stance of monetary policy inBrazil. The CMCI is a smoother version of the BMCI, possibly because the impact ofchanges in the observed values of the Selic rate is partially compensated by changes inthe value of the real exchange rate. The Brazilian monetary policy, in the 2000:9-2005:4 period and according to the last two indicators, has been expansionary nearelection months.
