Changes in the monetary policy and credibility index

Maria Thalita Arruda Oliveira Olivindo (), Roberto Tatiwa Ferreira () and Rodolfo Herald Costa Campos ()
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Maria Thalita Arruda Oliveira Olivindo: Federal University of Ceará (CAEN/UFC)
Roberto Tatiwa Ferreira: Federal University of Ceará (CAEN/UFC)
Rodolfo Herald Costa Campos: State’s University of Rio Grande Do Norte (UERN)

Empirical Economics, 2025, vol. 69, issue 3, No 10, 1363-1381

Abstract: Abstract This paper proposes a central bank (CB) credibility index and investigates changes in the conduct of Brazilian monetary policy between 2002 and 2021. According to Blinder (2000), the CB builds its credibility by pursuing and achieving its goals. We use a Taylor Rule to estimate the time-varying probability of the CB’s reaction to maintaining the agents’ inflation expectations towards the announced target. This probability provides our credibility index, which has correlation coefficients around 0.95, 0.90, 0.95 and 0.93 with the indexes of Cecchetti and Krause (Federal Reserve Bank St. Louis Rev 84:99–117, 2002. https://doi.org/10.20955/r.84.47-60 ), De Mendonça (Appl Econ (20):2599–2615, 2007. https://doi.org/10.1080/00036840600707324 ), De Mendonça and Guimarães e Souza (Econ Model 26(6), 1228–1238, 2009. https://doi.org/10.1016/j.econmod.2009.05.010 ) and Levieuge et al. (Rev World Econ 154:493–535, 2018. https://doi.org/10.1007/s10290-018-0308-6 ), respectively. Furthermore, it reflects the main stylized facts about changes in Brazilian monetary policy. Between 2002 and 2008, the Central Bank of Brazil (BCB) acts consistently and persistently to maintain price stabilization. However, after the 2008 international crisis the BC focuses on the output gap and acts in a discretionary way to combat inflation. As of 2016, evidence points to a new change in Brazilian monetary policy, which once again reacted firmly to maintain price stability.

Keywords: Monetary policy; Taylor rule; Credibility; Dynamic model averaging (DMA) (search for similar items in EconPapers)
JEL-codes: E47 E52 E58 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1007/s00181-025-02776-3

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