Performing a Bayesian VAR to Analyze how Monetary Policy's Credibility is Affected and Affects Over Time: The Brazilian Experience

This article measures and analyzes how the monetary policy's credibility is dynamically related to macroeconomic performance in Brazil. Performing a Bayesian VAR with Litterman/Minnesota priors, we obtain results highlighting that monetary policy's credibility gains (and losses) are affected by inflation rate shocks, while the higher such credibility the easier the control of inflationary expectations and thereby taming effective inflation rates becomes a natural result over time. Furthermore, we verified other important new-keynesian predictions for Brazil, such as the pass-through effect, the output-inflation relation (Phillips curve), the interest rate-output one (IS curve), as well as the reaction of such a rate to inflation shocks (Taylor rule). At last, the monetary policy's credibility is negatively affected by an undervaluated domestic currency.