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Interest rate expectations based on Taylor rule versus central bank’s survey: which performs better in a large emerging economy?

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  • Helder Ferreira de Mendonça
  • João Pedro Neves Maia

Abstract

We analyzed rationality, content, and anchoring of the monetary policy interest rate expectations (for 3, 6, 9, and 12 months ahead), taking into account the Brazilian data from January 2003 to July 2020. We consider expectations based on two perspectives: expectations gathered from a Taylor rule and market expectations obtained from the survey carried out by the central bank. The findings point out that, concerning rationality and anchoring, the interest rate expectations based on a Taylor rule performed better than expectations from the Central Bank of Brazil’s (CBB) survey, even when we consider the Top 5 forecasters. Moreover, our analysis shows that the content of monetary policy interest rate expectations based on a Taylor rule and CBB’s survey (including Top 5 forecasters) is different. Thus, they may be seen as complementary sources of information on the future interest rate. Concerning anchoring of the monetary policy interest rate expectations, the CBB’s survey expectations are not anchored, while the result for the expectations based on a Taylor rule shows the opposite for horizons up to 9 months ahead.

Suggested Citation

  • Helder Ferreira de Mendonça & João Pedro Neves Maia, 2022. "Interest rate expectations based on Taylor rule versus central bank’s survey: which performs better in a large emerging economy?," Applied Economics, Taylor & Francis Journals, vol. 54(39), pages 4532-4544, August.
    • Handle: RePEc:taf:applec:v:54:y:2022:i:39:p:4532-4544
    DOI: 10.1080/00036846.2022.2031859
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