Expectations about monetary policy and the behaviour of the central bank

Abstract

Using microdata from the IBRE-FGV Consumer Survey we investigate if Brazilianconsumers form expectations consistent with the Taylor rule and if the consistencychanges according to the monetary policy conducted by the Central Bank of Brazil.We find that the public can properly understand the relationship between interestrates and inflation in the rule framework, but not the relationship between interestrates and unemployment, probably due to the single mandate adopted in Braziland some features of the data. The partial effects methodology introduced by Carvalhoand Nechio (2014) confirm these results. Furthermore, we also find that theconsistency of expectations significantly drops during periods that the central bankdeviates from the Taylor rule, indicating that a higher tolerance to inflationaryshocks can damage the coordination of society’s expectations.