Abrupt Monetary Policy Change and Unanchoring of Inflation Expectations

65 Pages Posted: 13 Feb 2024 Last revised: 22 Apr 2024

See all articles by Marco Bonomo

Marco Bonomo

Insper Institute of Education and Research

Carlos Carvalho

Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics; Kapitalo Investimentos

Stefano Eusepi

University of Texas at Austin

Marina Perrupato

Inter American Development Bank

Daniel Abib

The University of Western Ontario

João Ayres

Inter American Development Bank

Silvia Matos

FGV IBRE; FGV IBRE

Date Written: March 10, 2024

Abstract

Inflation expectations can quickly become unanchored if the central bank undermines its commitment to the inflation target. This paper exploits an abrupt change in monetary policy by the Brazilian Central Bank in 2011 and microdata from a daily survey of professional forecasters to establish support for this claim. Reanchoring came only years later, after a regime shift that included a change of government. A simple model with a well-defined concept of (un)anchored inflation expectations provides a coherent explanation and structural interpretation of our empirical findings.

Keywords: Inflation expectations, monetary policy, anchored expectations, unanchored expectations, monetary policy shifts, Brazil

JEL Classification: E53, E65

Suggested Citation

Bonomo, Marco and Carvalho, Carlos and Eusepi, Stefano and Perrupato, Marina and Abib, Daniel and Ayres, João and Matos, Silvia, Abrupt Monetary Policy Change and Unanchoring of Inflation Expectations (March 10, 2024). Available at SSRN: https://ssrn.com/abstract=4701732 or http://dx.doi.org/10.2139/ssrn.4701732

Marco Bonomo

Insper Institute of Education and Research ( email )

R Quata 300
Sao Paulo, 04542-030
Brazil

Carlos Carvalho (Contact Author)

Pontifical Catholic University of Rio de Janeiro (PUC-Rio) - Department of Economics ( email )

Rua Marques de Sao Vicente, 225/206F
Rio de Janeiro, RJ 22451
Brazil

HOME PAGE: http://https://sites.google.com/site/cvianac2/carloscarvalho

Kapitalo Investimentos ( email )

São Paulo
Brazil

Stefano Eusepi

University of Texas at Austin ( email )

2317 Speedway
Austin, TX Texas 78712
United States

Marina Perrupato

Inter American Development Bank ( email )

Daniel Abib

The University of Western Ontario ( email )

João Ayres

Inter American Development Bank ( email )

Silvia Matos

FGV IBRE ( email )

Presidente Carlos de Campos
417
Rio de Janeiro, RJ 22231080
Brazil

HOME PAGE: http://Portalibre.fgv.br

FGV IBRE ( email )

Presidente Carlos de Campos
417
Rio de Janeiro, RJ 22231080
Brazil

HOME PAGE: http://Portalibre.fgv.br

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