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Does Credibility Matter for Interest Rate Changes and Output Gaps? Econometric Experiment for an Emerging Economy

In: Advances in Time Series Data Methods in Applied Economic Research

Author

Listed:
  • Marcos V. N. Montes

    (Federal University of Espírito Santo)

  • Ricardo Ramalhete Moreira

    (Federal University of Espírito Santo)

Abstract

According to the credibility hypothesis, the higher the monetary policy credibility the lower the social costs underlying the efforts to sustain price stability, that is, the disinflation cost from adjusting the basic interest rate is decreasing in monetary policy credibility (Blinder in American Economic Review 90(5):1421–1431, 2000; Bomfim and Rudebusch in Journal of Money, Credit, and Banking 32:707–721, 2000; Walsh in Monetary theory and policy. MIT Press, 2010). We aimed at testing such a hypothesis for Brazil, from January 2003 to May 2015. By using five indicators for monetary policy credibility and performing VAR and Markov-Switching (MS) models, we found robust results suggesting a negative effect of credibility gains on interest rate changes and output gaps, thereby confirming the hypothesis for the Brazilian economy.

Suggested Citation

  • Marcos V. N. Montes & Ricardo Ramalhete Moreira, 2018. "Does Credibility Matter for Interest Rate Changes and Output Gaps? Econometric Experiment for an Emerging Economy," Springer Proceedings in Business and Economics, in: Nicholas Tsounis & Aspasia Vlachvei (ed.), Advances in Time Series Data Methods in Applied Economic Research, chapter 0, pages 25-51, Springer.
    • Handle: RePEc:spr:prbchp:978-3-030-02194-8_3
    DOI: 10.1007/978-3-030-02194-8_3
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    More about this item

    Keywords

    Monetary policy credibility; Output gaps; VAR; Markov-switching; Brazil;
    All these keywords.

    JEL classification:

    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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