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What Drives Inflation Expectations in Brazil? An Empirical Analysis

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  • Martin Cerisola
  • Gaston Gelos

Abstract

This study examines the macroeconomic determinants of survey inflation expectations in Brazil since the adoption of inflation targeting in 1999. The results suggest that the inflation targeting framework has helped anchor expectations, with the dispersion of inflation expectations declining considerably, particularly during periods of high uncertainty. We also find that apart from the inflation target, the stance of fiscal policy, as proxied by the ratio of the consolidated primary surplus to GDP, has been instrumental in shaping expectations. The importance of past inflation in determining expectations appears to be relatively low, and the overall empirical evidence does not suggest the presence of substantial inertia in the inflation process.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 05/109.

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Length: 22
Date of creation: 01 Jun 2005
Date of revision:
Handle: RePEc:imf:imfwpa:05/109

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Keywords: Inflation targeting; Economic models; inflation; monetary policy; inflation target; central bank; inflation targeting framework; price inflation; inflation rate; monetary economics; inflation process; lower inflation; real interest rate; inflation forecasts; monetary fund; high inflation; monetary institutions; inflation stabilization; inflation rates; price stability; real wages; monetary regime; inflation-targeting; low inflation; inflation dynamics; actual inflation; inflation tax; inflation targeting regime; monetary framework; relative prices; rational expectations; real interest rates; annual inflation; monetary policy frameworks; percent inflation; macroeconomic performance;

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References

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  1. Novaes, Ana Dolores, 1993. "Revisiting the inertial inflation hypothesis for Brazil," Journal of Development Economics, Elsevier, Elsevier, vol. 42(1), pages 89-110, October.
  2. 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, Elsevier, vol. 22(7), pages 1015-1040, December.
  3. Jordi Galí & Mark Gertler, 1998. "Inflation dynamics: A structural econometric analysis," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 341, Department of Economics and Business, Universitat Pompeu Fabra.
  4. Frederic S. Mishkin, 2004. "Can Inflation Targeting Work in Emerging Market Countries?," NBER Working Papers 10646, National Bureau of Economic Research, Inc.
  5. Vittorio Corbo & Oscar Landerretche & Klaus Schmidt-Hebbel, 2001. "Assessing Inflation Targeting after a Decade of World Experience," Working Papers, Oesterreichische Nationalbank (Austrian Central Bank) 51, Oesterreichische Nationalbank (Austrian Central Bank).
  6. Ana Katarina Campêlo & Francisco Cribari-Neto, 2003. "Inflation Inertia and Inliers: The Case of Brazil," Revista Brasileira de Economia, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 57(4), pages 713-739, October.
  7. Olivier Blanchard, 2004. "Fiscal Dominance and Inflation Targeting: Lessons from Brazil," NBER Working Papers 10389, National Bureau of Economic Research, Inc.
  8. Joel Bogdanski & Paulo Springer de Freitas & Ilan Goldfajn & Alexandre Tombini, 2002. "Inflation Targeting in Brasil: Shocks. Backward-Looking Prices and IMF Conditionality," Central Banking, Analysis, and Economic Policies Book Series, Central Bank of Chile, in: Norman Loayza & Raimundo Soto & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Editor) (ed.), Inflation Targeting: Desing, Performance, Challenges, edition 1, volume 5, chapter 13, pages 539-582 Central Bank of Chile.
  9. Cati, Regina Celia & Garcia, Marcio G P & Perron, Pierre, 1999. "Unit Roots in the Presence of Abrupt Governmental Interventions with an Application to Brazilian Data," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 14(1), pages 27-56, Jan.-Feb..
  10. Gaston Gelos & Alessandro Prati & Oya Celasun, 2004. "Obstacles to Disinflation," IMF Working Papers 04/111, International Monetary Fund.
  11. Oya Celasun & R. Gaston Gelos & Alessandro Prati, 2004. "Obstacles to disinflation: what is the role of fiscal expectations?," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 19(40), pages 441-481, October.
  12. Arminio Fraga & Ilan Goldfajn & Andre Minella, 2003. "Inflation Targeting in Emerging Market Economies," NBER Working Papers 10019, National Bureau of Economic Research, Inc.
  13. Alesina, Alberto & Summers, Lawrence H, 1993. "Central Bank Independence and Macroeconomic Performance: Some Comparative Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 25(2), pages 151-62, May.
  14. Reisen Valderio A & Cribari-Neto Francisco & Jensen Mark J, 2003. "Long Memory Inflationary Dynamics: The Case of Brazil," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, De Gruyter, vol. 7(3), pages 1-18, October.
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