What Drives Inflation Expectations in Brazil? An Empirical Analysis

IMF Working Papers, June 1, 2005

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The study examines the macroeconomic determinants of survey inflation expectations in Brazil since the adoption of inflation targeting in 1999.
The inflation targeting framework has helped anchor expectations, with the dispersion of inflation expectations declining considerably, particularly during periods of high uncertainty.
Apart from the inflation target, the stance of fiscal policy, as proxied by the ratio of the consolidated primary surplus to GDP, has been instrumental in shaping expectations.
The importance of past inflation in determining expectations appears to be relatively low.
The overall empirical evidence does not suggest the presence of substantial inertia in the inflation process.

Strengthening and maintaining an effective inflation targeting framework can reduce the dispersion of inflation expectations, especially in periods of high uncertainty.
Fiscal policy credibility—measured by the consolidated primary surplus to GDP—matters for anchoring inflation expectations and should be a focus of policymakers aiming for stable inflation expectations.
Given the relatively low role of past inflation in shaping expectations and the lack of substantial inertia, monetary policy may have more immediate effects on expectations than models assuming strong inflation persistence would imply.

Author: Martin D. Cerisola
Publication date: June 1, 2005
Series: Working Paper No. 2005/109
Issue: 109
Volume: 2005
Pages: 22
DOI: https://doi.org/10.5089/9781451861280.001
Stock No: WPIEA2005109
ISBN: 9781451861280
ISSN: 1018-5941
Subject: Fiscal policy, Inflation, Inflation targeting, Price controls, Real effective exchange rates
Keywords: central bank, inflation expectation, WP

IMF Working Paper — What Drives Inflation Expectations in Brazil? An Empirical Analysis (Martin D. Cerisola, June 1, 2005).