(Mis)Alignment between observed and expected monetary policy: The case of Brazil

Jose Angelo Divino and Carlos Haraguchi

International Economics, 2024, vol. 178, issue C

Abstract: The economic agents’ perception of the monetary policy might not coincide with the central bank conduct. We investigate this issue by using both actual and expected data identified by professional forecasters for Brazil, an emerging economy that has long adopted the inflation-targeting regime. We estimate observed, expected, and forward-looking interest rate rules, apply Full-Information Rational Expectations (FIRE) tests, assess restrictions implied by models of information rigidity, and perform several robustness checks. The estimated policy rules respond to inflation deviations and output gap according to theoretical grounds. Professional forecasters, however, do not believe in aggressiveness to fight inflation in longer forecasting horizons, while FIRE tests unveil information rigidity in the short run. There is a misalignment between the Central Bank practice and the private agents’ perception of the monetary policy in the long but not in the short run, suggesting unanchored long-term inflation expectations.

Keywords: Monetary policy; Rational expectations; Information rigidity; Interest rate rules (search for similar items in EconPapers)
JEL-codes: D84 E47 E52 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inteco:v:178:y:2024:i:c:s2110701724000283

DOI: 10.1016/j.inteco.2024.100505

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