Regime Switches, Biased Expectations, and the Brazilian Inflationary Experience

Marcelo F. Salomon

Review of Development Economics, 2003, vol. 7, issue 2, 294-310

Abstract: The paper analyzes how an error in inflation expectations helped maintain high interest rates in the wake of the major stabilization plans launched in Brazil over the past 18 years. Newly implemented low‐inflation measures lacked credibility and forced agents to expect a higher inflation rate than the one effectively observed, creating a wedge between ex‐post and ex‐ante real interest rates. The results also indicate that past failures have helped undermined the credibility of new measures.

Date: 2003
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