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Estimating the Credibility of Brazilian Monetary Policy using Forward Measures and a State-Space Model

Flávio Val, Wagner Gaglianone (), Marcelo Klotzle and Antonio Pinto

No 463, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: The objective of this study is to estimate the credibility of the monetary policy followed by the Central Bank of Brazil (BCB) during the period from January 2006 to July 2017. To estimate this credibility, we use the Kalman filter in two measures of inflation expectations (breakeven inflation and Focus survey) with a medium/long-term forecast horizon. The results indicate four shifts in the perceived credibility based on breakeven inflation: (i) decline in mid-2008, during the U.S. subprime mortgage crisis; (ii) relative stability from early 2009 to mid-2015; (iii) strong decline by the end of 2015; and (iv) recovery from mid-2016 until mid-2017 (end of the sample). The credibility measure based on the Focus survey showed a more regular behavior, reflecting the degree of anchoring of the survey-based inflation expectations for the considered horizon. By associating the estimated credibility with financial and macroeconomic variables, we have also found that credibility is relatively persistent and seems not to be influenced by short-run movements of such variables

Date: 2017-09
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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