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arXiv · 2205.00924

A short term credibility index for central banks under inflation targeting: an application to Brazil

Alain Hecq·Joao Issler·Elisa Voisin
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Abstract

This paper uses predictive densities obtained via mixed causal-noncausal autoregressive models to evaluate the statistical sustainability of Brazilian inflation targeting system with the tolerance bounds. The probabilities give an indication of the short-term credibility of the targeting system without requiring modelling people's beliefs. We employ receiver operating characteristic curves to determine the optimal probability threshold from which the bank is predicted to be credible. We also investigate the added value of including experts predictions of key macroeconomic variables.

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Alain Hecq, Joao Issler, Elisa Voisin. 2022-05-02. A short term credibility index for central banks under inflation targeting: an application to Brazil. https://arxiv.org/abs/2205.00924

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