Measuring the Monetary Policy’s Structural Credibility by the Expected Inflation Determinants: a Kalman Filter Approach for Brazil

Abstract

This article proposes an extension of Moreira (2013a,b) as a method for measuring monetary policy’s structural credibility under inflation targeting regimes by the main determinants of the expected inflation, and using a Kalman approach with calibration. Such a method does not present some restrictions found in the existing credibility indexes, such as in Cecchetti and Krause (2002). The proposed approach was applied on the Brazilian case as an illustration and obtained robust results demonstrating that there exists a mutual dynamic relationship between expected inflation, observed inflation and the credibility behavior over time.