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Inflation targeting credibility and reputation: The consequences for the interest rate

  • de Mendonça, Helder Ferreira
  • de Guimarães e Souza, Gustavo José

The measurement of credibility and reputation is fundamental for the analysis of countries which adopted inflation targeting. Under this perspective, the objective of this article is to illustrate which measures of credibility and reputation are most useful in predicting variations of interest rates. Given a specific inflation target, this relationship is valuable for central bankers as well as for private agents trying to predict the central bank's policies. Due to the fact that Brazil represents a potential laboratory experiment in which the effects of an adoption of inflation targeting after more than a half decade can be observed, an analysis through several indices and its relation with the basic interest rate is made. The findings denote that the credibility indices based on reputation represent an alternative in the cases where the series of inflation expectation are not available. Furthermore, the empirical evidence confirms the hypothesis that higher credibility implies lower variations in the interest rate for controlling inflation.

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Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 26 (2009)
Issue (Month): 6 (November)
Pages: 1228-1238

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Handle: RePEc:eee:ecmode:v:26:y:2009:i:6:p:1228-1238
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30411

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  1. Svensson, Lars, 1999. "How Should Monetary Policy Be Conducted in an Era of Price Stability," Seminar Papers 680, Stockholm University, Institute for International Economic Studies.
  2. Pierre-Richard Agénor & Mark P. Taylor, 1992. "Testing for Credibility Effects," IMF Staff Papers, Palgrave Macmillan, vol. 39(3), pages 545-571, September.
  3. Svensson, Lars E.O. & Faust, John, 1998. "Transparency and Credibility: Monetary Policy with Unobservable Goals," Seminar Papers 636, Stockholm University, Institute for International Economic Studies.
  4. Helder de Mendonca, 2007. "Towards credibility from inflation targeting: the Brazilian experience," Applied Economics, Taylor & Francis Journals, vol. 39(20), pages 2599-2615.
  5. Agenor, Pierre-Richard & Taylor, Mark P, 1993. "Analysing Credibility in High-Inflation Countries: A New Approach," Economic Journal, Royal Economic Society, vol. 103(417), pages 329-36, March.
  6. Stephen G. Cecchetti & Stefan Krause, 2002. "Central bank structure, policy efficiency, and macroeconomic performance: exploring empirical relationships," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 47-60.
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