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

Abstract

Purpose

This 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/approach

Based 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.

Findings

The 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/value

The 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.

Citation

de Mendonça, H.F. and de Lima, C.N. (2023), "Does central bank credibility from professional forecasters and consumers affect the interest rate and its expectations?", Journal of Economic Studies, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JES-04-2023-0205