Estimating the credibility of Brazilian monetary policy using a Kalman filter approach |
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| Institution: | 1. Central Bank of Brazil, Av. Presidente Vargas, 730, 14th Floor, Centro, 20071-900 Rio de Janeiro, RJ, Brazil;2. Pontifical Catholic University of Rio de Janeiro, Rua Marquês de São Vicente, 225, Gávea, Rio de Janeiro, RJ 22451-900, Brazil;3. Research Department, Central Bank of Brazil, Av. Presidente Vargas, 730, 14th Floor, Centro, 20071-900 Rio de Janeiro, RJ, Brazil;1. Department of Economics, University of Calgary, Calgary, Alberta T2N 1N4, Canada;2. Department of Economics and Finance, University of South Alabama, Mobile, AL 36688, United States;1. Northern Kentucky University, Haile/US Bank College of Business, Nunn Drive, Highland Heights, KY 41099, United States;2. University of New Mexico, Anderson School of Business, 1 University of New Mexico, Albuquerque, NM 87131, United States;1. Rajagiri Business School, Rajagiri Valley Campus, Kochi, India;2. Center for Energy and Sustainable Development (CESD), Montpellier Business School, Montpellier, France;3. Department of Economics, University of Pretoria, Pretoria, 0002, South Africa;4. European University Institute, Via delle Fontanelle, 18, I-50014, Florence, Italy;5. Rimini Centre for Economic Analysis, Waterloo, Canada (RCEA) LH3079, Wilfrid Laurier University, 75 University Ave W., ON, N2L3C5, Waterloo, Canada |
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| 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 2006–2015. To estimate this credibility, we use the Kalman filter in three measures of inflation expectation: two collected via market survey and via consumer polling, as well as the breakeven inflation. The results provide evidence of the existence of three shifts in the perceived credibility of BCB inflation targets during the period analyzed: (i) credibility declined sharply in mid-2008, at the most critical moment of the subprime mortgage crisis; (ii) credibility was relatively stable from early 2009 through mid-2013; (iii) credibility trended downward thereafter, when the real interest rate was less than the minimum rate compatible with the inflation target. By associating the estimated credibility with macroeconomic and financial variables, we find a downward trend in credibility during recessionary periods and an inverse relationship between credibility and output gap, between credibility and variation in the BRL/USD exchange rate, and between credibility and historical inflation. In addition, we find that market survey and breakeven inflation credibility measures are important in predicting sovereign risk. Furthermore, changes in the inflation rate are important for predicting only credibility measured on consumer polling, validating the assumption that measures from consumer polls are backward-looking and formed based on consumers’ adaptive expectations. |
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| Keywords: | Credibility Kalman filter Monetary policy Brazil |
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