Disagreement in expectations and the credibility of monetary authorities in the Brazilian inflation targeting regime

Abstract

Based on market expectations reported by the Central Bank of Brazil for the SELIC interest rate, the IPCA inflation, the exchange rate (BRL/USD) and the growth rate of industrial production for four different forecasting horizons, this work analyzes the term structures of disagreement in expectations regarding the future values of these variables. It also investigates the driving factors of disagreement, paying special attention to the influence of monetary authorities’ credibility. An extensive regression analysis shows that the levels of the term structures of disagreement are negatively related to the output gap (although this result is not very robust); and that the levels of the term structures of disagreement in expectations about the IPCA inflation rate and the SELIC interest rate have a strong negative relationship with central bankers’ credibility; this relationship is positive in the case of the growth rate of industrial production.

Keywords

• Disagreement in expectations
• Monetary policy
• Credibility
• Term structures