Monetary Policy's Structural Credibility and the Role of the Expected Inflation: A Kalman Filter Investigation

This work proposes an alternative method for measuring monetary policy's structural credibility under inflation targeting regimes by the main determinants of the expected inflation, and using a Kalman approach. It shows that such a method does not present some restrictions found in the existing credibility indexes, such as in Cecchetti and Krause (2002). It applies the new model and approach on the Brazilian case as an illustration and obtains robust results demonstrating that there exists a mutual dynamic relationship between expected inflation, observed inflation and the credibility behavior over time.