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(Mis)Alignment between observed and expected monetary policy: The case of Brazil

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  • Divino, Jose Angelo
  • Haraguchi, Carlos

Abstract

The economic agents’ perception of the monetary policy might not coincide with the central bank conduct. We investigate this issue by using both actual and expected data identified by professional forecasters for Brazil, an emerging economy that has long adopted the inflation-targeting regime. We estimate observed, expected, and forward-looking interest rate rules, apply Full-Information Rational Expectations (FIRE) tests, assess restrictions implied by models of information rigidity, and perform several robustness checks. The estimated policy rules respond to inflation deviations and output gap according to theoretical grounds. Professional forecasters, however, do not believe in aggressiveness to fight inflation in longer forecasting horizons, while FIRE tests unveil information rigidity in the short run. There is a misalignment between the Central Bank practice and the private agents’ perception of the monetary policy in the long but not in the short run, suggesting unanchored long-term inflation expectations.

Suggested Citation

  • Divino, Jose Angelo & Haraguchi, Carlos, 2024. "(Mis)Alignment between observed and expected monetary policy: The case of Brazil," International Economics, Elsevier, vol. 178(C).
  • Handle: RePEc:eee:inteco:v:178:y:2024:i:c:s2110701724000283
    DOI: 10.1016/j.inteco.2024.100505
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    More about this item

    Keywords

    Monetary policy; Rational expectations; Information rigidity; Interest rate rules;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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