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International Economics and Economic Policy

, Volume 16, Issue 4, pp 649–678 | Cite as

Does monetary policy credibility mitigate the effects of uncertainty about exchange rate on uncertainties about both inflation and interest rate?

  • Gabriel Caldas MontesEmail author
  • Caio Ferrari Ferreira
Original Paper

Abstract

In the present paper, we investigate the effects of the disagreement in expectations about exchange rate on the disagreements in expectations about inflation and about monetary policy interest rate in Brazil. The analysis seeks to verify whether the uncertainty related to the future behavior of the exchange rate affects both the process of inflation expectation formation and the process of monetary policy interest rate expectation formation. Besides, the paper investigates the role of monetary policy credibility in mitigating the effects of the disagreement in expectations about exchange rate on the disagreements in expectations about inflation and about monetary policy interest rate. The results indicate that the disagreement in expectations about exchange rate impacts the disagreements in expectations about both inflation and monetary policy interest rate. In addition, the findings indicate that credibility is capable of mitigating the transmission of uncertainties about the exchange rate to uncertainties about the inflation rate and the monetary policy interest rate. Thus, our estimates reveal that (i) the marginal effect of disagreement in expectations about exchange rate on the disagreement in expectations about inflation decreases with the level of credibility and, (ii) the marginal effect of disagreement in expectations about exchange rate on the disagreement in expectations about monetary policy interest rate decreases as credibility increases.

Keywords

Disagreement in expectation Exchange rate Credibility Inflation Interest rate 

JEL classification

D84 E37 E58 F41 

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Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2018

Authors and Affiliations

  • Gabriel Caldas Montes
    • 1
    Email author
  • Caio Ferrari Ferreira
    • 2
  1. 1.Department of Economics, and National Council for Scientific and Technological Development (CNPq) and CEMAFINUniversidade Federal FluminenseNiteróiBrazil
  2. 2.Department of Economics, and CEMAFINUniversidade Federal FluminenseNiteróiBrazil

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