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Deviating from Perfect Foresight but not from Theoretical Consistency: The Behavior of Inflation Expectations in Brazil

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  • Leilane de Freitas Rocha Cambara
  • Roberto Meurer, Gilberto Tadeu Lima

Abstract

The aim of this paper is to investigate whether inflation expectations in Brazil have characteristics and statistical properties that can be correlated (possibly in a causal way) with observed variables of interest and expectations about them. We test the hypothesis of perfect foresight in the formation of inflation expectations by the respondents of the official survey conducted by the Central Bank of Brazil, examining the behavior of the possible forecast errors. As these errors are biased and can be predicted, we reject the hypothesis of perfect foresight. We also test models of noisy and sticky information, and we cannot conclude that the deviations from perfect foresight can be explained by information rigidity. Additionally, with a Vector Error Correction model, we find evidence that the expectations about the related macroeconomic variables respond to each other as predicted by a theoretically-grounded macroeconomic model. Therefore, inflation expectations in Brazil are to an important extent consistent with more general expectations about the future performance of the economy.

Suggested Citation

  • Leilane de Freitas Rocha Cambara & Roberto Meurer, Gilberto Tadeu Lima, 2019. "Deviating from Perfect Foresight but not from Theoretical Consistency: The Behavior of Inflation Expectations in Brazil," Working Papers, Department of Economics 2019_36, University of São Paulo (FEA-USP).
    • Handle: RePEc:spa:wpaper:2019wpecon36
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    References listed on IDEAS

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    4. Minella, Andre & de Freitas, Paulo Springer & Goldfajn, Ilan & Muinhos, Marcelo Kfoury, 2003. "Inflation targeting in Brazil: constructing credibility under exchange rate volatility," Journal of International Money and Finance, Elsevier, vol. 22(7), pages 1015-1040, December.
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    More about this item

    Keywords

    Inflation expectations in Brazil; forecast errors in surveys; deviations from perfect foresight;
    All these keywords.

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E10 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - General
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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