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Credibility, Inflation Targets and Interest Rate: Long-Term Results for Brazil

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  • Augusto César Klassen Amorim Alves de Lima
  • Ricardo Ramalhete Moreira

Abstract

This study carried out an empirical investigation into the relationship between the credibility of monetary policy – measured based on seven indicators – and the necessary variation of interest rates to control inflation, replicating the methods proposed by Mendonça and Souza (2007), extending them for the period 1999-2020. The results obtained confirm the hypothesis that higher levels of credibility allow the Central Bank to control inflation with lower interest rate increases. Furthermore, evidence was found that, although the credibility indicators show a better adjustment relative to the data – indicating a forward-looking nature in the conduction of basic interest rates –, among the reputation indicators, short-run inflationary results have a stronger weight in the decisions of monetary policy, suggesting that public expectations with short-memory remain relevant in the sample period.

Suggested Citation

  • Augusto César Klassen Amorim Alves de Lima & Ricardo Ramalhete Moreira, 2022. "Credibility, Inflation Targets and Interest Rate: Long-Term Results for Brazil," International Business Research, Canadian Center of Science and Education, vol. 15(8), pages 1-70, August.
    • Handle: RePEc:ibn:ibrjnl:v:15:y:2022:i:8:p:70
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    References listed on IDEAS

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    2. Mr. Roberto Perrelli & Mr. Shaun K. Roache, 2014. "Time-Varying Neutral Interest Rate—The Case of Brazil," IMF Working Papers 2014/084, International Monetary Fund.
    3. Grégory Levieuge & Yannick Lucotte & Sébastien Ringuedé, 2018. "Central bank credibility and the expectations channel: evidence based on a new credibility index," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 154(3), pages 493-535, August.
    4. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
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    More about this item

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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