Credibility and monetary transmission channels under inflation targeting: An econometric analysis from a developing country

After more than two decades of inflation targeting in the world, it is important to evaluate if the adoption of this regime in a relevant developing country contributed to the creation of a better environment for the process of entrepreneurs' expectations formation. Brazil is part of an important group of developing countries (BRIC - Brazil, Russia, India and China) and represents a potential laboratory experiment in which the effects of an adoption of inflation targeting after more than a decade can be evaluated. Not enough is known about the consequences of inflation targeting credibility on both monetary policy and monetary policy transmission channels in developing countries that adopted inflation targeting. Hence, the paper analyzes the effects of credibility on the conduct of monetary policy, and the transmission channels through which monetary policy affect the economy. The study found that inflation targeting has represented an important strategy for the achievement of a more stable macroeconomic environment, which has been of great importance to investments and employment creation. Besides, the study found the following novelties: inflation targeting credibility positively affects entrepreneurs' expectations, expectations of entrepreneurs affect investment decisions and employment creation and the expectations of entrepreneurs are affected by the traditional transmission channels.

► We analyze monetary transmission channels in an inflation targeting BRIC country. ► Inflation targeting was important to create a stable macroeconomic environment. ► Inflation targeting credibility positively affects entrepreneurs' expectations. ► Expectations of entrepreneurs act as a transmission channel and affect investment. ► Expectations of entrepreneurs are affected by the traditional transmission channels.