Brazil: Credibility, Transparency, and the Limits of Discretion

The report criticizes the Central Bank of Brazil for its recent communication and ambiguous monetary policy reaction function, arguing that this has damaged institutional credibility and contributed to persistent inflation. It highlights that the current economic climate exhibits strong demand-side pressures rather than just supply shocks.

Key Takeaways

• 1.The Central Bank of Brazil's communication strategy around its reaction function has created confusion and damaged credibility.
• 2.Current inflationary pressures in Brazil are driven significantly by strong domestic demand, not just supply shocks.
• 3.The increased persistence of inflation is an endogenous result of previous policy choices, not an exogenous shock.

Table of Contents

• Transparency is not forward guidance
• Projections are not part of forward guidance and are not a reaction function either
• Inertia is not exogenous
• High current inflation and unanchored expectations are not predominantly the result of numerous supply shocks
• The relevant horizon is not an adjustment variable
• Conclusion

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