Inflation expectations, implicit targets and the credibility of monetary authorities

Abstract

This paper explores the dynamics of the inflation rate and the term structure of expected inflation (which refers to the 12, 24, 36 and 48 months-ahead inflation expectations) to estimate the path of the long-term inflation trend. This trend is treated as a latent variable in a state space model, which is then estimated using the Kalman filter. The trend is compared with the inflation target pursued by the Central Bank of Brazil (CBB), which allows assessing the anchoring of inflation expectations and monetary policy credibility. Overall, we show that there were sizeable changes in CBB’s credibility between November 2001 and September 2019, with a continuous deterioration since mid-2007 and a recovery starting in 2016.