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A short term credibility index for central banks under inflation targeting: An application to Brazil

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  • Hecq, Alain
  • Issler, João Victor
  • Voisin, Elisa

Abstract

Our goal is to provide econometric tools that could act as an almost real-time warning-system for central banks working under an Inflation-Targeting Regime. In any given month, it computes the probability that inflation will remain within the tolerance bounds set in advance by the Regime. So, our short-term index gives a proper response time for Central Banks, something long-term indices prevalent in the literature do not provide. Although we showcase Brazil in our application, our method could be broadly applied to other countries that operate under an Inflation-Targeting Regime. Our key statistic is the probability that inflation will be within the bounds in the next 1- 3- and 6-months ahead. It is based on predictive densities obtained from a mixed causal-noncausal autoregressive (MAR) model. We polish the accuracy of our key statistic using the receiver operating characteristic curve (ROC curve), something new in this literature.

Suggested Citation

  • Hecq, Alain & Issler, João Victor & Voisin, Elisa, 2024. "A short term credibility index for central banks under inflation targeting: An application to Brazil," Journal of International Money and Finance, Elsevier, vol. 143(C).
    • Handle: RePEc:eee:jimfin:v:143:y:2024:i:c:s0261560624000445
    DOI: 10.1016/j.jimonfin.2024.103057
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    More about this item

    Keywords

    Inflation rate; Forecasting; Central-bank credibility; Noncausal models; Predictive densities; Probabilities;
    All these keywords.

    JEL classification:

    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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