Does central bank credibility from professional forecasters and consumers affect the interest rate and its expectations?

Abstract

PurposeThis paper aims to contribute to the analysis concerning how inflation forecasts from different economic agents (professional forecasters and consumers) lead to varying levels of central bank credibility and how it affects the monetary policy interest rate and its expectations.Design/methodology/approachBased on the Brazilian economy data from June 2007 to May 2022, the authors provide evidence that is useful for search mechanisms that improve the conduct of monetary policy through the management of inflation expectations. The authors perform several ordinary least squares and generalized method of moments regressions inspired by the Taylor rule principle. In brief, the benchmark model considers that the monetary policy interest rate and its expectations respond to departures of inflation expectations to the target (a proxy for central bank credibility) and the level of economic activity.FindingsThe main result of the analysis is that inflation expectations from professional forecasters and consumers imply different perceptions of central bank credibility that affect the monetary policy interest rate and expectations for horizons until one year ahead.Originality/valueThe novelty that the authors bring from the analysis is that the authors calculate central bank credibility by taking into account the “public beliefs” of different economic agents. Furthermore, the authors analyze the effect of central bank credibility from professional forecasters and consumers on the monetary policy interest rate and its expectations.

The reaction of disagreements in inflation expectations to fiscal sentiment obtained from information in official communiqués

“…But why does this study draw attention to these issues and seek to analyze the relationships mentioned above? Among the institutional characteristics that IT countries should have, we can highlight the following as important for the task of influencing inflation expectations: (i) increased transparency and communication by institutions responsible for conducting economic policies through the provision of relevant information about the conduct of these policies and the state of the economy (Blinder et al, 2008;Montes & Lima, 2018;Montes & Nicolay, 2017;; (ii) central banks are expected to conduct credible policies in order to guide inflation expectations toward the inflation target (Blinder, 2000;Montes & Bastos, 2014;de Mendonça & Garcia, 2021); and (iii) fiscal policy should be coordinated with monetary policy, and governments should conduct fiscal policies avoiding both successive budget deficits and increases in public debt to unsustainable levels 1 (Mishkin, 2007;Montes & Acar, 2018). These characteristics are expected to have the ability to influence the inflation expectations formation process since they affect agents' perception of the conduct of economic policies and the state of the economy.…”