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Central bank credibility and inflation expectations: a microfounded forecasting approach

Published online by Cambridge University Press:  07 June 2022

João Victor Issler  and
Ana Flávia Soares
João Victor Issler*
Affiliation:
Brazilian School of Economics and Finance FGV EPGE, Rio de Janeiro, Brazil
Ana Flávia Soares
Affiliation:
Brazilian School of Economics and Finance FGV EPGE, Rio de Janeiro, Brazil
*
*Corresponding author. Email: joao.issler@fgv.br
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Abstract

Credibility is elusive, but Blinder [(2000) American Economic Review 90, 1421–1431.] generated a consensus in the literature by arguing that “A central bank is credible if people believe it will do what it says.” To implement this idea, we first measure people’s beliefs by using survey data on inflation’s expectations. Second, we compare beliefs with explicit (or tacit) targets, taking into account the uncertainty in our estimate of beliefs (asymptotic 95% robust confidence intervals). Whenever the target falls into this interval we consider the central bank credible. We consider it not credible otherwise. We apply our approach to study the credibility of the Brazilian Central Bank (BCB) by using a world-class database—the Focus Survey of forecasts. Using monthly data from January 2007 until April 2017, we estimate people’s beliefs of inflation 12 months ahead, coupled with a robust estimate of its asymptotic 95% confidence interval. Results show that the BCB was credible 65% of the time, with the exception of a few months in the beginning of 2007 and during the interval between mid-2013 throughout mid-2016.

Keywords

Central bank credibilitysurvey of expectationsconsensus forecastsforecast combinationpanel data
Type
Articles
Information
Macroeconomic Dynamics , Volume 27 , Issue 5 , July 2023 , pp. 1268 - 1288
Copyright
© The Author(s), 2022. Published by Cambridge University Press

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Footnotes

*

We thank the comments and suggestions given by the Editor, William A. Barnett, an anonymous Associate Editor, two anonymous referees, Marco Bonomo, Wagner Gaglianone, Felipe Iachan, Marcelo Moreira, Cezar Santos, and participants of the SNDE Symposium held in Tokyo, Japan, the LUBRAMACRO conference held in Aveiro, Portugal, and the IAAE meeting held in Montreal, Canada. Issler thanks the Conselho Nacional de Desenvolvimento Científico e Tecnológico—CNPq, FAPERJ, INCT, and FGV for financial support on different grants. This study was financed in part by the Coordenação de Aperfeiçoamento de Pessoal de Nível Superior—Brasil (CAPES)—Finance Code 001.

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