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

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  • Alain Hecq
  • Joao Issler
  • Elisa Voisin

Abstract

This paper uses predictive densities obtained via mixed causal-noncausal autoregressive models to evaluate the statistical sustainability of Brazilian inflation targeting system with the tolerance bounds. The probabilities give an indication of the short-term credibility of the targeting system without requiring modelling people's beliefs. We employ receiver operating characteristic curves to determine the optimal probability threshold from which the bank is predicted to be credible. We also investigate the added value of including experts predictions of key macroeconomic variables.

Suggested Citation

  • Alain Hecq & Joao Issler & Elisa Voisin, 2022. "A short term credibility index for central banks under inflation targeting: an application to Brazil," Papers 2205.00924, arXiv.org, revised Jul 2022.
    • Handle: RePEc:arx:papers:2205.00924
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    More about this item

    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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