Expectations about Monetary Policy and the Behaviour of the Central Bank

Using microdata from the IBRE-FGV Consumer Survey we investigate if Brazilian consumers form expectations consistent with the Taylor rule and if the consistency changes according to the monetary policy conducted by the Central Bank of Brazil. We find that the public can properly understand the relationship between interest rates and inflation in the rule framework, but not the relationship between interest rates and unemployment, probably due to the single mandate adopted in Brazil and some features of the data. The partial effects methodology introduced by Carvalho and Nechio (2014) confirm these results. Furthermore, we also find that the consistency of expectations significantly drops during periods that the central bank deviates from the Taylor rule, indicating that a higher tolerance to inflationary shocks can damage the coordination of society’s expectations.