Interest Rate Shocks, Central Bank's Credibility and Inflation Targeting Regime: Simulations in a Dynamic Stochastic General Equilibrium Model

This article analyzes the Central Bank's endogenous and nonlinear credibility, under shocks and inflation targeting regime. Monetary policy regimes are compared, which are different in terms of endogenous credibility levels and their nonlinear sensibility to the observed economic deviations. It shows that the higher the credibility level, the lower its sensibility to the observed deviations and, as a consequence, the higher the flexibility power for the central bank to stimulate the economy without expressive unstable results. This proposition is verified through a stochastic autoregressive dynamic model and a small numeric simulation.