Effect of monetary policy credibility on the fear of floating: Evidence from Brazil

Abstract

Based on the argument that monetary policy credibility can reduce the fear of floating (FF), we analyze this hypothesis for Brazil. Since expectations play a key role under Inflation Targeting, we also analyze whether credibility can affect the expectations of financial markets about the FF of the Central Bank. The results show credibility can reduce the FF, and financial markets expect less intervention by the Central Bank when credibility is higher. Thus, policymakers must pay attention to the credibility of their policies, otherwise they may be misinterpreted regarding both the goals they pursue and how they conduct monetary policy.