Deconstructing credibility: The breaking of monetary policy rules in Brazil

Abstract

*I w r o t e 4 l e t t e r s o f r e c o m m e n d a t i o n t o u n d e r g r a d u a t e a n d g r a d u a t e s t u d e n t s w h o e n d e d u p a c c e p t e d a t m a s t e r 's p r o g r a m s in t h e US a n d a P hD p r o g r a m in t h e UK. * I w a s in v ite d t o r e t u r n n e x t s u m m e r t o t e a c h a n o t h e r c o u r s e a n d p r o v i d e i n p u t f o r c u r r ic u la i m p r o v e m e n t in t h e M a s t e r o f S c ie n c e in P o lic y E c o n o m ic s .

Inflation Expectations: Review and Evidence

“…De Mendonça and Galveas (2013) show that, when controlling for central bank transparency, the forward-looking and hybrid specifications of the Phillips curve are more suitable for explaining current inflation than the purely backward-looking specifications. Yet, inflation expectations react more strongly to actual inflation, exchange rate movements, and output shocks when there is a problem of central bank credibility (Cortes and Paiva 2017). A deterioration in the fiscal position could also impede the anchoring of inflation expectations because of fears that monetary policy will be constrained, especially in cases where high interest rates imply unstable public debt dynamics (Cerisola and Gelos 2009;de Mendonça and Veiga 2014).…”

Measurement of the efficiency of monetary policy in Indonesia

“…This interesting fact can only be explained by the discretionary indicator, showing that if monetary policy decisions rely more on discretion, the stock market response becomes increasingly erratic and can cause irrational responses. (Cortes & Paiva, 2017) argued that a long-term effort of credibility construction in Brazil dating back to the 1990s suffered a setback in 2011, when the Board of Governors of the Central Bank of Brazil (BCB) was changed at the onset of the Rousseff government. They found preliminary evidence that the looser monetary policy under Rousseff's first term has contributed to a deterioration of inflation expectations and dynamics, which have become more sensitive to inflationary shocks.…”

Facing the Quadrilemma: Taylor rules, intervention policy and capital controls in large emerging markets

“…As stated, inflation targeting dominated the Central Bank of Brazil's interest rate policy in both sub-periods, as it did in the full sample period, but the estimated response is weaker in the post-GFC period 9 . This finding sheds some light on the concern that Brazil is adhering less to inflation targeting in recent years (Cortes and Paiva, 2017). However, no output response is estimated in Brazil in either sub-period, nor is there evidence of systematic responses to exchange rates, terms-of-trade or current account movements.…”

“…The country is the largest emerging market to adopt an inflation targeting regime (IT), starting in July 1999 and formally continuing to date. Cortes and Paiva (2017) argue that the Central Bank of Brazil (BCB) succeeded in anchoring inflation expectations and gaining credibility until 2011, when a new discretionary-based policy was adopted despite a formal IT rule. However, it is evident from numerous policy statements that output stabilization is also an important element in setting interest rate policy in Brazil.…”