Does Credibility Matter for Interest Rate Changes and Output Gaps? Econometric Experiment for an Emerging Economy

Marcos V. N. Montes and Ricardo Ramalhete Moreira ()
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Marcos V. N. Montes: Federal University of Espírito Santo
Ricardo Ramalhete Moreira: Federal University of Espírito Santo

Chapter Chapter 3 in Advances in Time Series Data Methods in Applied Economic Research, 2018, pp 25-51 from Springer

Abstract: Abstract According to the credibility hypothesis, the higher the monetary policy credibility the lower the social costs underlying the efforts to sustain price stability, that is, the disinflation cost from adjusting the basic interest rate is decreasing in monetary policy credibility (Blinder in American Economic Review 90(5):1421–1431, 2000; Bomfim and Rudebusch in Journal of Money, Credit, and Banking 32:707–721, 2000; Walsh in Monetary theory and policy. MIT Press, 2010). We aimed at testing such a hypothesis for Brazil, from January 2003 to May 2015. By using five indicators for monetary policy credibility and performing VAR and Markov-Switching (MS) models, we found robust results suggesting a negative effect of credibility gains on interest rate changes and output gaps, thereby confirming the hypothesis for the Brazilian economy.

Keywords: Monetary policy credibility; Output gaps; VAR; Markov-switching; Brazil (search for similar items in EconPapers)
JEL-codes: E37 E58 (search for similar items in EconPapers)
Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:spr:prbchp:978-3-030-02194-8_3

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DOI: 10.1007/978-3-030-02194-8_3

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