Applied Economics

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Effects of transparency, monetary policy signalling

and clarity of central bank communication on
disagreement about inflation expectations

G. C. Montes, L. V. Oliveira, A. Curi & R. T. F. Nicolay

To cite this article: G. C. Montes, L. V. Oliveira, A. Curi & R. T. F. Nicolay (2016) Effects
of transparency, monetary policy signalling and clarity of central bank communication
on disagreement about inflation expectations, Applied Economics, 48:7, 590-607, DOI:
10.1080/00036846.2015.1083091

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Published online: 03 Sep 2015.

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 APPLIED ECONOMICS, 2016
VOL. 48, NO. 7, 590–607
http://dx.doi.org/10.1080/00036846.2015.1083091

Effects of transparency, monetary policy signalling and clarity of central bank

communication on disagreement about inflation expectations
G. C. Montesa,b, L. V. Oliveiraa, A. Curia and R. T. F. Nicolaya
a
Department of Economics, Fluminense Federal University, Niterói, Brazil; bResearcher of the National Council for Scientific and
Technological Development (CNPq), Niterói, Brazil

ABSTRACT KEYWORDS
The literature on transparency and central bank communication and the literature on disagree- Transparency;
ment about expectations are evolving; however, both have been evolving separately. Despite the communication; clarity;
advances in the literature, several key issues remain open and there are gaps to be filled. disagreement; central bank
Therefore, this study analyses the effects of monetary policy signalling and clarity of central
JEL CLASSIFICATION
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bank communication on disagreement about inflation expectations. It also investigates whether

E44; E58; E37
greater transparency coincides with lower levels of disagreement in inflation expectations in
Brazil. The findings suggest that transparency is important to reduce disagreement about infla-
tion expectations. Moreover, our estimates indicate that central bank communication and clarity
affect disagreement about inflation expectations in Brazil.

I. Introduction the same expectation. The literature on disagreement

has discussed issues like its sources, its consequences,
Central bank transparency is a key instrument in
how to measure the phenomenon and how to link
monetary policy-making (Geraats 2002; De Haan,
disagreement with macroeconomic uncertainty
Eijffinger, and Rybiński 2007). The literature high-
(Patton and Timmermann 2010; Dovern, Fritsche,
lights that, if economic agents use all available infor-
and Slacalek 2012; Andrade et al. 2014).
mation when forming their expectations, then
Since the early 2000s, the literature on transpar-
transparency is important because it improves the
ency and central bank communication and the lit-
perception of the public regarding central bank’s
erature on disagreement about expectations are
actions. In this sense, transparency and central bank
evolving; however, both are evolving separately. So
communication play an essential role (Svensson 1999;
far, there are few studies relating transparency with
Blinder et al. 2008; De Mendonça and Galveas 2013).
disagreement about inflation expectations (e.g.,
Although many advances have already been made,
Ehrmann, Eijffinger, and Fratzscher 2010; Siklos
the literature on central bank communication con-
2013). Regarding the literature on the factors deter-
tinues to evolve and studies have been drawing
mining the disagreement in expectations, only one
attention to the importance of clarity of central
study deals at the same time with the influence of
bank communication (Jansen, 2011a; Bulíř, Čihák,
transparency and central bank communication on
and Jansen 2013; Bulíř, Čihák, and Šmídková 2013).
disagreement (Ehrmann, Eijffinger, and Fratzscher
Recently, the key question is: how beneficial are
2010). However, the study developed by Ehrmann,
transparency, monetary policy signalling and the
Eijffinger, and Fratzscher (2010) does not consider
clarity of central bank communication for the expec-
the influence of clarity of central bank communica-
tation formation process?
tion on disagreement. Furthermore, the measures of
In turn, analysing survey data on expectations,
transparency and central bank communication used
either of the general public or professional forecasters,
by the authors are different from those we use in the
it is observed that disagreement in expectations is
present work. Finally, Ehrmann, Eijffinger, and
substantial and varies over time; as stated by
Fratzscher (2010) and Siklos (2013) do not examine
Mankiw, Reis, and Wolfers (2003), not everyone has

CONTACT: G. C. Montes gabrielmontesuff@yahoo.com.br

© 2015 Taylor & Francis
 APPLIED ECONOMICS 591

these issues in developing economies adopting the II. Central bank transparency, monetary policy
inflation targeting regime. signalling and clarity of communication
This study analyses the influence of monetary pol-
Central bank transparency and communication play
icy signalling, transparency and clarity of central bank
important roles in the task of managing inflation
communication on disagreement about inflation
expectations, as both can reduce the asymmetric
expectations in Brazil.1 The use of transparency and
information between the central bank and the pub-
central bank communication in emerging economies
lic. According to van der Cruijsen, Eijffinger, and
is not easy. In a general way, these economies have
Hoogduin (2010), transparency improves consensus
weak institutions and have experienced hyperinfla-
across forecasters, anchor inflation expectations and
tions. Therefore, the analysis of the effects caused by
improves policy anticipation.
central bank communication and transparency on
Few works empirically study the relationship
disagreement about inflation expectations is particu-
between transparency and inflation expectations.
larly relevant for emerging economies. This study is
Siklos (2003) shows how the release of inflation
the first to present evidence for these effects in an
reports can influence private sector inflation fore-
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important inflation targeting emerging economy

casts. His findings indicate that inflation reports help
(Brazil).
to reduce inflation forecast errors. Van der Cruijsen
The study contributes to the literature in the
and, Demertzis (2007) studied the link between
following aspects:
inflation and inflation expectations with central
(1) We analyse the effects of monetary policy
bank transparency. Using data obtained from eight
signalling on disagreement about inflation
industrialized countries, the authors find that infla-
expectations. The analysis makes use of the
tion expectations are better anchored when the cen-
standard approach based on dummy variables
tral bank has a higher degree of transparency.
as proposed by Rosa and Verga (2007).
Once transparency is important to reduce infla-
(2) We analyse the influence of clarity of central
tion and anchor inflation expectations, central bank
bank communication on disagreement about
communication becomes an important tool to
inflation expectations. Thus, following the still
monetary policy. Central bank communication can
incipient literature on the clarity of central
be defined as the provision of information by the
bank communication (Jansen 2011a, 2011b;
central bank to the public regarding present and
Bulíř, Čihák, and Jansen 2013), we use a
future monetary policy, the economic outlook and
well-established statistic from the literature
the goals of the central bank (Blinder et al. 2008). In
on readability, the Flesch (1948) statistic (or
turn, it is impossible to reach a high degree of
the Flesch reading ease score).
transparency and accountability without central
(3) We investigate whether greater transparency
bank communication. Thus, central bank communi-
coincides with lower levels of disagreement in
cation acts in a helpful way since it guides agents’
inflation expectations. The analysis uses the
expectations; therefore, it plays an important role in
two indices of central bank transparency pre-
the decision-making process (Jansen 2011a).
sented by De Mendonça and Galveas (2013).
In the last two decades, the literature on central
We estimate a set of regressions whose dependent
banking has shown empirical evidence for the
variable is a measure of disagreement about inflation
importance of central bank communication in the
expectations. Besides the control variables com-
process by which agents form their expectations. The
monly used in the literature (see Mankiw, Reis, and
main findings suggest that financial markets, equity
Wolfers (2003) and Dovern, Fritsche, and Slacalek
markets and inflation expectations react to monetary
(2012)), we also use other explanatory variables that
policy announcements and signalling (Blinder et al.
capture the effects of transparency, monetary policy
2008).
signalling and the clarity of central bank
The studies regarding the effect of central bank
communication.
communication on inflation expectations are scarcer

1
We consider the expectations formed by financial market experts. According to Ullrich (2008), financial market experts watch the central bank very closely;
we would expect that an influence on their expectation formation is more likely than an influence on expectations of consumers.
 592 G. C. MONTES ET AL.
in the literature. Kuttner and Posen (1999) analysed
the link between inflation expectations and inflation
targeting coupled with more communication in the
UK, New Zealand and Canada. The study of Kliesen
and Schmid (2004) investigates the influence of sur-
prises in macroeconomic data releases, monetary
policy surprises and central bank communication
of the Federal Reserve on inflation expectations.
Their findings suggest that Federal Reserve commu-
nication reduces uncertainty about the future infla-
tion rate, while surprises in monetary policy actions
increase uncertainty about the future path of the
inflation rate. The study of Jansen and De Haan
(2007) relates central bank communication regard-
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ing risks to price stability (measured on the basis of
the frequency and strength of the keyword ‘vigi-
lance’) and break-even inflation in the euro area;
this work finds a negative relationship between
both variables. Ullrich (2008) analysed the informa-
tional content of the monthly introductory state-
ments of the European Central Bank (ECB)
president explaining interest rate decisions and
their impact on inflation expectations formed by
financial market experts in the euro area. The results
suggest that communication about the path of future
monetary policy helps in explaining inflation
expectations.
The increase in monetary policy communication in
the past decades has been justified by benefits of policy
transparency (Čihák 2007; Geraats 2002). Most of the
empirical literature on central bank communication
has focused either on quantitative measures of mone-
tary policy transparency or short-term effects of central
bank announcements, with much less attention paid to
the overall clarity of the communication (Bulíř, Čihák,
and Jansen 2013). However, an important question
arose: does clarity of central bank communication
matter? So far, few studies were developed aiming to
answer this question.
The clarity of central bank communications refers
to the quality of information provided and the capa-
city of comprehension the public has regarding what
central bank communicates. Thus, since clearer
communication is more easily understood (Jansen
2011a), it is suggested that clarity of central bank
communication reduces the information asymmetry
between central bankers and the public.
Jansen (2011a, 2011b) used the Flesh ease level
(Flesch 1948) and the Flesh–Kincaid grade level
(Kincaid et al. 1975) to measure the clarity. Both
studies use the Humphrey–Hawkins testimonies.
Jansen (2011a) analysed the effect of clarity over
financial market volatility. The author points out
three important results: central bank clarity matters,
it reduces volatility and its effect varies over time. In
turn, Jansen (2011b) analysed the difference between
Paul Volcker’s and Allan Greenspan’s styles of com-
munication. The results indicate that there is no
significant difference between the clarity of the two
Federal Reserve chairmen.
Bulíř, Čihák, and Jansen (2013) also measured the
clarity with Flesch (1948) and Kincaid et al. (1975).
They examined whether the clarity of central bank
communication about inflation varies with the eco-
nomic environment in six countries (Chile, Czech
Republic, Poland, Sweden, Thailand and the UK)
and the euro area. The results suggest that a single
model for clarity of central bank communication is
not appropriate. Rather, when studying the clarity of
communication, country-specific and institution-
specific factors are highly relevant.
In turn, Bulíř, Čihák, and Šmídková (2013) con-
structed a clarity index based on the idea that com-
munication tools should send consistent signals in
order to make communication clearer. The absence
of ambiguity makes the communication clear. The
index measures ambiguity between an estimated
projection update and the content presented in the
statement. The results indicate that the ECB has
accomplished a clear communication between 1999
and 2007.
Considering inflation targeting emerging econo-
mies, De Mendonça and Simão Filho (2007) argued
that central banks with greater transparency contri-
bute to decrease both inflation and the interest rate.
Their findings for the Brazilian economy show that
an increase in information quality (clarity) brings
about a significant change in the speed with which
market expectations evolve. Furthermore, central
bank transparency contributes to anchor public
expectations and to affect long-run interest rates.
Moreover, De Mendonça and Simão Filho (2008)
analysed the impact of transparency at the Central
Bank of Brazil (CBB) on macroeconomic variables.
They consider the effects of CBB’s announcements
and publications on several variables that are impor-
tant to the inflation targeting system, including
expectations. Their findings suggest that increases

in CBB’s transparency and information quality bring
about a significant shift in the speed with which
market expectations change.
So far, the studies have focused on the asymmetry
between the central bank and the public, but when
one looks more closely at individual players (fore-
casters), it is easy to see that there is disagreement in
their expectations. In this sense, do transparency,
central bank communication and clarity of informa-
tion affect this disagreement?
III. Empirical evidence on disagreement in
inflation expectations
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The literature on disagreement has investigated this
issue from many angles. Regarding studies based on
time series analysis, one should place extra emphasis
on those seeking to explain disagreement by looking
at the behaviour of potentially relevant macroeco-
nomic variables – for example, the output gap and
the volatility of shocks affecting the economy (e.g.,
Mankiw, Reis, and Wolfers (2003) and Dovern,
Fritsche, and Slacalek (2012)). There are also studies
aiming to explain disagreement by looking at mone-
tary policy actions and monetary authorities’ char-
acteristics (e.g., Ehrmann, Eijffinger, and Fratzscher
(2010) and Siklos (2013). The groundbreaking work
of Mankiw, Reis, and Wolfers (2003) analyses
50 years of inflation expectations extracted from
three different sources.2 The main conclusions of
the paper are unveiling the substantial differences
in expectations about future inflation among consu-
mers and professional economists; furthermore, the
paper shows that disagreement varies significantly
over time, being sensitive to the level and the varia-
bility of the inflation rate.
Another important study on this subject was done
by Filardo and Guinigundo (2008). The authors use
a database comprised of forecasts prepared by pro-
fessional forecasters in 12 Asian-Pacific countries.3
They not only argue that greater transparency leads
to less disagreement about the inflation outlook, but
also suggest that disagreement about inflation expec-
tations lowers after a country adopts the inflation
targeting regime as its monetary policy framework.
2
The Michigan Survey of Consumer Attitudes and Behaviour, the Livingston Survey and the Survey of Professional Forecasters.
3
Australia, China, Hong Kong, India, Indonesia, Japan, Korea, Malaysia, New Zealand, Philippines, Singapore, Thailand. The primary source is compiled by the
consulting firm Consensus Economics.
4
Canada, France, Germany, Italy, Japan, United Kingdom and United States.
APPLIED ECONOMICS 593
In turn, Ehrmann, Eijffinger, and Fratzscher
(2010) investigated whether and to what extent cen-
tral bank communication and increased transpar-
ency have affected disagreement among private
agents’ forecasts of key macroeconomic variables.
The hypothesis is that the reduction in forecast dis-
persion should occur if (i) information-related
deviations from the rational expectation assump-
tions hold, and if (ii) central banks manage to
increase the signal-to-noise ratio of their public
communication, or alternatively to reduce the cost
of information processing by making relevant pieces
of information available more readily. They use data
for seven countries of the European Union (France,
Germany, Italy, the Netherlands, Spain, Sweden and
the UK) and five other countries (Canada, Japan,
Norway, Switzerland and the United States). The
paper finds empirical evidence that the announce-
ment of a quantified inflation objective and
enhanced transparency about economic dimensions
of the conduct of monetary policy – such as the
release of the central bank’s internal forecasts of
inflation and output – are effective in that regard.
The reduction in forecast disagreement is not only
statistically significant, but also economically impor-
tant. The findings of the paper indicate that this
reduction has been achieved because forecasters in
countries with more transparent and open central
banks manage to update their forecasts in response
to news in a smoother fashion, generating less
disagreement.
The study of Dovern, Fritsche, and Slacalek
(2012) analyses countries forming the G74 and uses
data from the period between October 1989 and
October 2006. The authors investigate the determi-
nants of disagreement in expectations regarding the
future behaviour of real variables (GDP, consump-
tion, investment and unemployment) and nominal
variables (inflation and interest rates). Regarding
disagreement about future inflation, the results
achieved by panel data analysis show that cross-sec-
tional dispersion increases with the uncertainty
inherent to inflation developments. Furthermore,
individual regressions for each country indicate
that disagreement about inflation expectations is
 594 G. C. MONTES ET AL.

more sensitive to the inflation level in Italy, Japan
and the UK, countries where central banks have
become independent only around the mid-1990s.
Finally, Siklos (2013) studied inflation forecast dis-
agreement in Australia, Canada, New Zealand,
Sweden, the UK, Japan, Switzerland, the USA and
the euro area. He estimates a model of inflation fore-
cast disagreement which considers the influence of
central bank transparency. His findings suggest that
central bank transparency tends to increase forecast
disagreement. However, he points out that this result
can be explained by the negative consequences of
greater openness (e.g., van der Cruijsen, Eijffinger,
and Hoogduin 2010 and Ehrmann, Eijffinger, and
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thus improves the accuracy of inflation expectations.
The explanation for this is as follows: assuming that
an increase in central bank transparency reduces the
asymmetric information between the central bank
and the public, it is possible to make a connection
with the first welfare theorem of economics. Thus,
an increase in central bank transparency increases
welfare because there is reduction in forecast errors,
which comes from a lower uncertainty about central
bank preferences.
V. Data and methodology
Data

Fratzscher 2010) or by the push on the diversity of

views brought about by the provision of information The database contains 143 monthly observations of
to the public; the precise reason is yet unclear. macroeconomic and financial variables, as well as
expectations regarding future inflation. Data are
taken from the period between May 2003 and
IV. Inflation targeting in Brazil: transparency March 2015. The source is the CBB website, in
and central bank communication which researchers and market practitioners can
Brazil adopted the inflation targeting regime in June find information regarding macroeconomic and
1999. Since then, the main task of the CBB has been financial variables,5 as well as expectations about
to guide the public’s expectations towards the infla- the future paths of some key variables.6 Agents can
tion target. In this sense, the CBB has experienced a also find the summaries of COPOM’s discussions,
higher level of transparency and independence of detailed information on economic conditions and
instruments to control inflation and achieve its goals. COPOM’s inflation projections.7
In terms of transparency, according to De In Brazil, the minutes of the COPOM meeting are
Mendonça and Galveas (2013), a good example that the main document of the CBB. They are prepared
CBB transparency has improved is that the Monetary aiming to explain monetary policy decisions and
Policy Committee (COPOM) minutes provide a sum- signal the future intentions of the CBB in relation
mary of the meeting discussion. The minutes are to monetary policy. Regarding COPOM minutes, the
divided into two sections. One section explains the database refers to the first decade of their regular
reasons for the COPOM’s decision. In this section, a publication, which always happens 8 days after the
CBB evaluation on current and future inflation and meeting that decides the basic interest rate (SELIC).
the measures adopted to ensure that the inflation The series used in our analysis are:
target will be reached are presented. The other section
presents a survey that covers the economic environ- Disagreement in inflation expectation (disag)
ment and considers the main points on the first day This series is built upon inflation expectations pro-
of the COPOM’s meeting. vided by the Investor Relations Group (Gerin) of the
According to De Mendonça and Galveas (2013), CBB through the so-called ‘Focus-Market Readout’.8
central bank transparency reduces uncertainty and In order to better understand its construction, it is
5
http://www.bcb.gov.br/?TIMESERIESEN.
6
https://www3.bcb.gov.br/expectativas/publico/consulta/serieestatisticas.
7
http://www.bcb.gov.br/?MINUTES.
8
Focus-Market Readout presents the results of Gerin’s market expectations survey, a daily survey of forecasts of roughly 120 banks, asset managers and other
institutions (real sector companies, brokers, consultancies and others) for the Brazilian economy. The survey of market expectations began in May 1999 as
part of the transition to the inflation targeting system. The survey was created in order to monitor market expectations regarding the main
macroeconomic variables, and improve the inputs for the monetary policy decision-making process. The system calculates sample statistics from the
data gathered in real time, and thereby enables the generation of daily reports for the members of the Board. One of these reports, the Focus-Market
Readout, is published every Monday at the Central Bank website at the internet.
 APPLIED ECONOMICS 595

worth presenting the following notation: t is the forecasting horizon does not vary with the passage of
instant of time the projection is made,9 i identifies time. As proposed in the work of Dovern, Fritsche,
the agent who calculates the forecast (i 2 I, where I and Slacalek (2012), the conversion of fixed event
is the set of agents surveyed10), X is the variable to be forecasts into fixed horizon ones is accomplished by
forecasted (in this case, inflation) and Ei,tXa+j repre- applying the formula below:
sents the projection that the ith agent calculates at
12  ðm  1Þ m1
time t about the value that the variable X will take in Et X12ðjþ1Þ ¼ Et Xaþj þ Et Xaþjþ1 ;
the end of year a þ j.11 The average of the distribu- 12 12
tion of expectations calculated by the I agents at time j ¼ 0; 1; 2; 3; . . . ;
t about the value that X will take in the end of year
where m represents the month in which the projec-
a + j is given by EtXa+j = 1/I ∑Ei,tXa+j. In turn,

 tion is made (or the month containing period t) and
Emin
t X
aþj
¼ min Ei;t Xaþj ; i 2 I denotes the mini-
EtX12(j+1) denotes the average of agents’ expectations
mum value of the distribution, while Emax t X
aþj
¼

 about the value that the variable X will take in the
max Ei;t X ; i 2 I denotes its maximum value.
aþj
end of the next 12ðj þ 1Þ months. The same formula
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The range of the distribution is defined as
Dt Xaþj ¼ Emaxt X
aþj
 Emin
t X
aþj 12
. As the CBB does
not provide the expectations reported by each
agent (turning unfeasible the computation of other
disagreement measures – e.g. the inter-quartile
range), the measure of disagreement that we use
throughout this article is DtXa+j.
Forecasts such as Ei,tXa+j are known as fixed event
ones because the forecasting horizon varies with the
passage of time; indeed, the prospective period of
forecasts made at t for the value that the variable X
will take in the end of year a + j decreases as t pro-
gresses within a, the year in which expectations are
made.13 This pattern of decreasing forecasting hori-
zons as t advances through the year brings about a
seasonal behaviour in disagreement measures based on
fixed event forecasts, since expectation dispersion
tends to decrease as the forecasting horizon shrinks.14
It is to avoid the seasonal behaviour inherent to
disagreement measures based on fixed event fore-
casts that most articles in the literature (e.g.,
Mankiw, Reis, and Wolfers 2003; Patton and
Timmermann 2010; Dovern, Fritsche, and Slacalek
2012) recur to fixed horizon forecasts, in which the
is used to interpolate minimum and maximum pro-
jections, which are inserted into it to calculate the
values of the range. In the end of the process, we
derive a term structure of disagreement in expecta-
tions, which is comprised of the ‘vertices’ DtX12,
DtX24, . . ., etc. As the CBB discloses forecasts for
the current and the next four years, the formula
above can be applied by taking j = 0,1,2,3.
Therefore, we can always interpolate forecasts for
the fixed time horizons of 12, 24, 36 and 48 months.
The procedure described above is performed
daily, allowing us to derive term structures of dis-
agreement for each business day. Time series com-
prised of daily observations are converted to the
monthly frequency by calculating monthly averages.
The final step is performing a principal component
analysis, extracting the first principal component of
the four time series DtX12, DtX24, DtX36 and DtX48;
this component is a good proxy for their common
trend. The application of this technique has a long
tradition in the study of conventional yield curves
(Litterman and Scheinkmann 1991), which justifies
its application to the term structures that we study
here. It also allows filtering out erratic shifts on a

9
This instant is characterized by a specific date, namely, a day d, a month m and a year a.
10
The number of agents in I is I.
11
j = 0: current year; j = 1: next year immediately after the current year; j = 2: two years after the current year; j = 3: three years after the current year; j = 4:
four years after the current year.
12
It is worth mentioning that the Gerin informs to the public only the main statistics of the distributions of expectations, that is, means, medians, minimum
and maximum values, SDs and coefficients of variation.
13
An example could help to clarify this issue. Suppose that an agent, in March 2000, computes his expectation about the value of the inflation rate in the
end of 2000. In this case we can say that the time horizon of the forecast is 10 months because the first 2 months of 2000 have already passed and
inflation figures for January and February are known. By the same line of reasoning, when this agent computes his inflation expectation in September 2000
about the value of the inflation rate at the closing of 2000, the time horizon of his forecast decreases to only 4 months.
14
Indeed, the disagreement measure observed in March 2000 for the value that the inflation rate will take in the end of 2000 tends to be greater than the
disagreement measure observed in September 2000 for the value that the same variable will take at the closing of 2000. The divergence measure tends to
increase again in March 2001, since the current year becomes 2001 and the time horizon of the forecast becomes 9 months.
 596 G. C. MONTES ET AL.
given disagreement measure (say, DtX12), which do
not reflect upon the others. Such movements can be
regarded as outliers, thus they should be ignored.
Inflation (inflation_ipca)
This series uses the inflation rate accumulated in 12
months (Índice de Preços ao Consumidor Amplo
(IPCA) – series code 13522 obtained from the CBB).
Inflation volatility (vol_ipca)
The measure for inflation volatility is calculated by
means of the series representing the inflation rate
accumulated in 12 months (IPCA – series code
13522 obtained from the CBB). The measure is
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derived by applying the formula vol_ipca = (inflatio-
n_ipcat – inflation_ipcat-1)2.
Dummy variable for the subprime crisis (d_subprime)
To capture the effect of the subprime mortgage crisis
on the Brazilian economy, we included a dummy
variable that assumes value 1 for the period between
September 2008 and June 2009, and zero otherwise.
Monetary policy signaling (d_sig, d_down and d_up)
Dummy variables of monetary policy signalling are
built based on the glossary prepared (Table B1,
Appendix B), which is intended to codify the
words and expressions contained in the minutes of
the COPOM meetings. The methodology and the
glossary are based on the work of Rosa and Verga
(2007). The first dummy variable, d_sig, can take
three values: −1 (dovish), 0, +1 (hawkish). The
value of zero suggests that the current level of the
Selic rate is appropriate to maintain price stability
over the medium term; the value −1 characterizes an
easing period, i.e., it is possible that the Selic rate will
be cut in the near future; the value +1 signals a
future monetary policy tightening. This variable
(d_sig) seeks to capture the effect of signalling future
monetary policy on disagreement. In turn, when
there is an indication that the COPOM will reduce
the Selic rate at its next meeting, the dummy variable
denoted d_down is used, which assumes value 1
according to this signalling and zero otherwise.
When there is an indication that the COPOM will
increase the Selic rate at its next meeting, the
dummy variable denoted d_up is used, which
assumes value 1 according to this signalling and
zero otherwise.
Clarity of central bank communication (f_index)
The standard statistic from the literature on clarity
of central bank communication is used: the Flesch
(1948) statistic, or the Flesch reading ease score. The
Flesch (1948) reading ease score uses three variables:
the number of words (#word), the number of sen-
tences (#sentences) and the number of syllables
(#syllables) used in the text. On the basis of these
variables, the Flesch reading ease score is calculated
as follows:
f_index = 206.835 − 1.015 × (#word/#sentences)
− 84.6 × (#syllables/#words).
Therefore, when the indicator (f_index) increases,
it means that the clarity has increased.
Transparency indices (transp_bl and transp_fl)
Most of the empirical literature on central bank
transparency is based on transparency indices that
consider a number of questions related to informa-
tion disclosure by the central bank or actual practice
(e.g., Fry et al. 2000; Chortareas, Stasavage, and
Sterne 2002; Eijffinger and Geraats 2006; Dincer
and Eichengreen 2010; Siklos 2011). However, it is
important to note that these indices are subject to
subjectivity because researchers attribute scores to
each question. Besides, institutional features of the
central banks do not change in short periods.
Therefore, the use of this type of index is not ade-
quate for an analysis with time series data (De
Mendonça and Galveas 2013).
In order to avoid the abovementioned problems
in the analysis of central bank transparency with
time series data, we use the central bank transpar-
ency indices proposed by De Mendonça and
Galveas (2013). Due to the fact that central bank
transparency is associated with the reduction of
asymmetric information between the central bank
and the public (Walsh 2003), the convergence
between inflation and the inflation target can be
considered to be a measure of transparency. The
paper of De Mendonça and Galveas (2013) presents
two indices for measuring CBB transparency: the
backward-looking transparency index (transp_bl)
and the forward-looking transparency index
(transp_fl), which are built based on inflation and
inflation expectations, respectively.
The transp_bl depends on the success of the CBB
in achieving the inflation target. This is particularly
relevant because it indicates the central bank’s

performance in managing monetary policy. The
transp_bl is a result of:
transp bl ¼
8 in leading inflation expectations to the inflation tar-
>
> 1 if πt ¼ πt
<  
1  πbound1 π πt  πt if πlower
upper bound
i
bound
< πt <πi
>
> i i
: upper bound
0 if πt  πi or πt  πlower
i
bound
where πt is the inflation accumulated in 12 months
(measured by the National Consumer Price Index
(extended) – IPCA – official price index); πi is the
weighted inflation target (last 12 months)15; πbound is
i
the limit of the tolerance interval defined for the
inflation rate observed in the end of the current
Downloaded by [University of Sussex Library] at 12:16 22 September 2017
year and πi is the inflation target (current year).
In this sense, when there is maximum transpar-
ency (πt ¼ πt and thus there is no surprise to the
public), the transp_bl is equal to 1. Contrary to this,
when the inflation exceeds the bounds of the toler-
ance interval, the transp_bl is equal to 0. Hence, the
variable transp_bl ranges between 0 and 1.
In turn, since the success of inflation targeting
depends to a great degree on the public’s expecta-
tions concerning inflation, an important point in the
inflation targeting analysis is the forward-looking
behaviour of the public regarding inflation. In this
sense, any divergence between inflation expectations
and the inflation target may reveal a high level of
asymmetric information, which can be induced by
strong central bank’s opacity. On the contrary, a
great convergence between inflation expectations
and the inflation target is an indication that the
central bank is successful in coordinating expecta-
tions. Thus, the transp_fl variable results from:
8 9
>
< 1 if Et ðπtþ12 Þ ¼ πtþ12
1 
transp fl ¼ bound E t ðπ tþ12 Þ  π
πiþ1  πiþ1 >
: 0 if E ðπ
t tþ12 Þ  πi
where Et ðπtþ12 Þ is the inflation expectation for the
next 12 months; πtþ12 is the weighted inflation target
for the same period16; πbound
iþ1 is the limit of the
tolerance interval defined for the inflation rate
observed in the next 12 months and πiþ1 is the
inflation target pursued for the next year.
15
For example, the weighted inflation target in June of 2003 is a result of (6 × target 2003 + 6 × target 2002).
16
For example, the weighted inflation target in July 2004 is a result of (5 × target 2004 + 7 × target 2005).
APPLIED ECONOMICS 597
Therefore, if Et ðπtþ12 Þ exceeds the tolerance inter-
val, then transp_ fl is equal to 0; such circumstances
may suggest that the central bank is failing in its role
get. This case reveals that monetary policy manage-
; ment may not be clear to the public, bringing about
a high level of asymmetric information. On the other
hand, the case where transp_ fl is equal to 1 indicates
that central bank transparency improves the mone-
tary policy efficiency, since it promotes the conver-
gence between inflation expectation and the
inflation target. The variable transp_ fl also varies
between 0 and 1. In short, the closer this index is
to 1 (0), the greater is the central bank’s transpar-
ency (opacity).
Methodology
Our interest in this study is the empirical signifi-
cance of the determinants of disagreement about
inflation expectations in Brazil. Based on Mankiw,
Reis, and Wolfers (2003), the following benchmark
econometric model (Equation 1) is estimated:
disag ipca ¼ β0 þ β1 inflation ipcat
þ β2 vol ipcat2
þ β3 d subprime þ 1 ;t ; (1)
where ξ1 is a random error term.
The lag of two periods, present in the inflation
volatility variable, was determined on an empirical
basis, following the general-to-specific method, and
on the principle of parsimony according to data
release. This methodology takes into consideration
not only the statistical significance of the parameters,
>
=

 upper bound
if π lower bound
< Et ðπ tþ12 Þ < π ;
tþ12 i
upper bound
i
>
;
or Et ðπtþ12 Þ  πi lower bound
but also diagnostic tests, in order to ensure that the
chosen model has explanatory power and thus guar-
antees a parsimonious equation (Hendry 2001). In
addition, it is reasonable that agents take some time
to observe inflation volatility and its effects on
expectations.
 598 G. C. MONTES ET AL.
Aiming at analysing the effects of monetary policy
signalling and the clarity of central bank communi-
cation on disagreement about inflation expectations,
we estimate different variants of the benchmark
econometric model. In order to capture the role of
clarity of central bank communication in the poten-
tial link between monetary policy signalling and
disagreement about inflation expectations
(Equations 5, 6 and 7), we add interaction terms
between the variable measuring clarity (f_index)
and the variables capturing monetary policy signal-
ling (d_sign, d_down and d_up).
disag ipca ¼ β4 þ β5 inflation ipcat
þ β6 vol ipcat2 þ β7 d subprime
Downloaded by [University of Sussex Library] at 12:16 22 September 2017
(2)
þ β8 d up þ 2 ;t ;
disag ipca ¼ β9 þ β10 inflation ipcat
þ β11 vol ipcat2 þ β12 d subprime (3)
þ β13 d down þ 3 ;t ;
disag ipca ¼ β14 þ β15 inflation ipcat
þ β16 vol ipcat2 þ β17 d subprime (4)
þ β18 d sig þ 4 ;t ;
disag ipca ¼ β19 þ β20 inflation ipcat
þ β21 vol ipcat2
(5)
þ β22 d subprime
þ β23 d up  f index þ 5 ;t ;
disag ipca ¼ β24 þ β25 inflation ipcat
þ β26 vol ipcat2
þ β27 d subprime (6)
þ β28 d down  f index
þ 6 ;t ;
disag ipca ¼ β29 þ β30 inflation ipcat
þ β31 vol ipcat2 þ β32 d subprime (7)
þ β33 d sig  f index þ 7 ;t :
In the equations above, ξ2, ξ3, ξ4, ξ5, ξ6 and ξ7, are
random error terms.
Due to the facts that, under inflation targeting, the
main task of the central bank is guaranteeing that
both inflation and inflation expectations converge to
the target and that transparency plays a key role in
this task, the equations presented below are modified
relative to those found in the work of Mankiw, Reis,
and Wolfers (2003). Indeed, Equations (8)–(16) (see
below) try to incorporate the potential effects of
transparency.
disag ipca ¼ α0 þ α1 vol ipcat2
þ α2 transp bl þ α3 d subprime
þ ε1 ; t ; (8)
disag ipca ¼ α4 þ α5 vol ipcat2
þ α6 transp fl þ α7 d subprime
þ ε2 ;t ; (9)
disag ipca ¼ α8 þ α9 vol ipcat2
þ α10 transp bl þ α11 transp fl
þ α12 d subprime þ ε3 ;t ; (10)
disag ipca ¼ α13 þ α14 vol ipcat2 þ α15 transp bl
þ α16 transp fl þ α17 d subprime (11)
þ α18 d up þ ε4 ;t ;
disag ipca ¼ α19 þ α20 vol ipcat2
þ α21 transp bl þ α22 transp fl
þ α23 d subprime
þ α24 d down þ ε5 ;t ; (12)
disag ipca ¼ α25 þ α26 vol ipcat2 þ α27 transp bl
þ α28 transp fl þ α29 d subprime (13)
þ α30 d sig þ ε6 ;t ;
disag ipca ¼α31 þ α32 vol ipcat2
þ α33 transp bl þ α34 transp fl
(14)
þ α35 d subprime
þ α36 d up  f index þ ε7 ;t ;
disag ipca ¼ α36 þ α37 vol ipcat2
þ α38 transp bl þ α39 transp fl
þ α40 d subprime
þ α41 d down  f index þ ε8 ;t ; (15)
disag ipca ¼ α42 þ α43 vol ipcat2 þ α44 transp bl
þ α45 transp fl þ α46 d subprime
þ α47 d sig  f index þ ε9 ;t :
(16)

In these equations, ε1, ε2, ε3, ε4, ε5, ε6, ε7, ε8 and ε9
are random error terms.
The econometric analysis makes use of ordinary
least squares (OLS), the generalized method of
moments (GMM) and two-step GMM. Due to the
problems of autocorrelation and heteroscedasticity,
which are common in macroeconomic time series,
and since there is a risk of endogeneity problems,
GMM is chosen to deal with these problems (Hansen
1982).
For a more efficient GMM estimator than OLS,
overriding restrictions need to be considered
(Wooldridge 2001). Therefore, with the intention
of testing the validity of the overriding restrictions,
Downloaded by [University of Sussex Library] at 12:16 22 September 2017
a standard J-test is performed (Hansen 1982). GMM
estimates adopted a standard procedure based on
Johnston (1984), i.e., the chosen instruments were
dated to the period t – 1 or earlier. Cragg (1983)
pointed out that overidentification analysis has an
important role in the selection of instrumental vari-
ables to improve the efficiency of the estimators. In
addition, we estimate the two-step GMM with
Windmeijer (2005) corrections to address small-
sample downward biases on SEs (the results for the
two-step GMM estimates are present in Tables A3
and A4, Appendix A).
VI. Evidence
Aiming at observing the relationship between the
main regressors and the general level of disagree-
ment about inflation expectations in the Brazilian
economy, the first empirical procedure is presenting
ordinary correlations (Table 1). As expected, Table 1
reveals: (i) a positive correlation between disagree-
ment and inflation, (ii) a positive correlation
between disagreement and inflation volatility, (iii) a
negative correlation between disagreement and
transparency and (iv) a negative correlation between
disagreement and clarity of central bank communi-
cation. In addition, we observe: (v) a negative corre-
lation between disagreement and the variable
indicating that the COPOM will increase the Selic
rate at its next meeting (d_up), (vi) a positive corre-
lation between disagreement and the variable indi-
cating that the COPOM will reduce the Selic rate at
its next meeting (d_down) and (vii) a negative cor-
relation between disagreement and the act of issuing
monetary policy signals (d_sig).
APPLIED ECONOMICS 599
Table 1. Correlations.
Variables disag_ipca
disag_ipca 1.000
inflation_ipca 0.785
vol_ipca 0.297
transp_bl −0.343
transp_fl −0.445
f_index −0.032
d_up −0.105
d_down 0.171
d_sig −0.157
Notes: Authors’ elaboration.
Before estimating Equations (1)–(16), unit root
tests – augmented Dickey–Fuller (ADF), Phillips–
Perron (PP) and Kwiatkowski–Phillips–Schmidt–
Shin (KPSS) – were made (Table 2). The results
show that all series are I(0) according to the follow-
ing criterion: when at least two of the three tests
indicate that the series does not have a unit root,
then the series is considered to be stationary.
We now turn to the econometric results. Tables 3
and 4 show the estimates. Table 3 provides: (i) the
results obtained using the benchmark model
(Equation 1); (ii) the results obtained by considering
the effects of monetary policy signalling (Equations
2, 3 and 4) and (iii) the results obtained by consider-
ing the joint effect of monetary policy signalling and
clarity of central bank communication (Equations 5,
6 and 7). In turn, Table 4 provides the results
obtained by considering the effects of transparency,
the influence of monetary policy signalling and the
role played by clarity of central bank
communication.
Regarding the estimates in Table 3, the coeffi-
cients for the influence of both inflation and infla-
tion volatility have the expected signs and statistical
significance in all specifications. These findings are
compatible with those reported in other studies such
as Mankiw, Reis, and Wolfers (2003), Capistrán and
Timmermann (2009) and Dovern, Fritsche, and
Slacalek (2012).
The novelty in our estimates concerns the effects
of monetary policy signalling and clarity of central
bank communication on disagreement about infla-
tion expectations. The findings presented in Table 3
suggest that the act of signalling future monetary
policy (d_sig) reduces the general level of disagree-
ment about inflation expectations; indeed, estimated
coefficients are negative and statistically significant.
Furthermore, the act of signalling future monetary
policy with clarity (d_sig*f_index) is also beneficial
 Downloaded by [University of Sussex Library] at 12:16 22 September 2017

600

Table 2. Unit root tests.

ADF PP KPSS
Variables Test Eq. Lag t-Stat 10% Eq. Band. t-Stat 10% Eq. Band. t-Stat 1%
disag_ipca Level I 1 −6.06 −2.58 I 9 −4.989 −2.578 I/T 9 0.306 0.216
1st difference I/T 5 0.094 0.216
2nd difference
f_index Level I 11 −1.76 −2.579 I/T 1 −4.866 −3.145 I/T 8 0.155 0.216
1st difference N 0 −15.35 −1.61521
2nd difference
vol_ipca Level I/T 0 −7.441 −3.146 I/T 3 −7.437 −3.146 I/T 6 0.176 0.216
G. C. MONTES ET AL.

1st difference
2nd difference
transp_fl Level I/T 7 −4.315 −3.146 I/T 4 −2.936 −3.145 I 9 0.593 0.739
1st difference N 9 −11.692 −1.615
2nd difference
transp_bl Level I 1 −3.092 −2.578 I 5 −3.216 −2.578 I 9 0.221 0.739
1st difference
2nd difference
inflation_ipca Level I 12 −1.902 −2.578 I/T 5 −4.570 −3.145 I 9 0.318 0.739
1st difference N 3 −3.233 −1.615
2nd difference
Source: Authors’ elaboration.
Notes: ADF – the final choice of lag was made based on modified Akaike criterion. PP and KPSS tests – lag is the lag truncation chosen for the Bartlett kernel. ‘I’ denotes intercept; ‘I/T’ denotes intercept and trend and ‘N’
denotes none.

Table 3. OLS and GMM regressions: influence of inflation, inflation volatility, subprime crisis, monetary policy signalling and clarity of central bank communication on disagreement
(May 2003–March 2015).
Dependent Equation OLS Equation GMM
Variable: Disag_Ipca 1 2 3 4 5 6 7 1 2 3 4 5 6 7
C −2.155*** −2.095*** −2.304*** −2.211*** −2.105*** −2.338*** −2.238*** −1.633*** −1.698*** −2.193*** −1.904*** −1.684*** −2.275*** −1.955***
(0.310) (0.265) (0.250) (0.235) (0.264) (0.258) (0.237) (0.226) (0.211) (0.230) (0.325) (0.222) (0.253) (0.333)
[−6.946] [−7.91] [−9.2] [−9.395] [−7.971] [−9.06] [−9.452] [−7.237] [−8.055] [−9.52] [−5.863] [−7.575] [−8.98] [−5.87]
inflation_ipca 0.29*** 0.308*** 0.296*** 0.304*** 0.309*** 0.302*** 0.308*** 0.206*** 0.248*** 0.264*** 0.254*** 0.244*** 0.277*** 0.263***
(0.049) (0.039) (0.039) (0.038) (0.039) (0.039) (0.038) (0.039) (0.041) (0.033) (0.058) (0.044) (0.034) (0.060)
[5.854] [7.834] [7.619] [8.02] [7.854] [7.687] [8.136] [5.225] [6.088] [8.112] [4.384] [5.576] [8.102] [4.389]
vol_ipca (−2) 0.092*** 0.055** 0.085*** 0.065*** 0.054** 0.088*** 0.066*** 0.167*** 0.074* 0.086* 0.082* 0.079* 0.089** 0.079*
(0.031) (0.026) (0.023) (0.023) (0.025) (0.024) (0.023) (0.042) (0.044) (0.047) (0.044) (0.047) (0.043) (0.045)
[2.936] [2.112] [3.666] [2.886] [2.129] [3.647] [2.948] [3.969] [1.664] [1.848] [1.85] [1.686] [2.062] [1.748]
d_subprime −0.842*** −1.005*** −0.968*** −1.025*** −1.005*** −0.948*** −1.012*** −1.455*** −1.619*** −1.458*** −1.483*** −1.621*** −1.423*** −1.476***
(0.107) (0.123) (0.118) (0.120) (0.124) (0.114) (0.117) (0.459) (0.447) (0.273) (0.335) (0.453) (0.277) (0.336)
[−7.856] [−8.151] [−8.207] [−8.523] [−8.108] [−8.323] [−8.632] [−3.171] [−3.624] [−5.332] [−4.423] [−3.578] [−5.133] [−4.393]
d_up −0.382** −0.388**
(0.155) (0.166)
[−2.471] [−2.33]
d_down 0.34** 0.579***
(0.151) (0.214)
[2.258] [2.706]
d_sig −0.227*** −0.238***
(0.085) (0.091)
[−2.671] [−2.618]
(Continued )
 APPLIED ECONOMICS 601

to reduce disagreement about inflation expectations,

Notes: marginal significance levels: *** denotes 0.01, ** denotes 0.05 and *10%. SEs in parentheses and t-statistics in square brackets. Regarding OLS estimates, due to the problems of autocorrelation and
−0.01***

12.8946
0.3767
0.3575
0.3377
(0.004)
[−2.628]
as indicated by the negative signs and their statistical
7

17
significance.
It is also found that, when there is an indication
0.025**

13.8309
0.1808
0.3881
0.3696
(0.010)
[2.528]
that the COPOM will increase the Selic rate at its next
6

meeting, the general level of disagreement about infla-

15
tion expectations decreases, i.e., we found that d_up
−0.015**

heteroscedasticity (Table A1 in Appendix A shows the residual diagnostics tests), the reported t-statistics in the OLS estimates are based on the estimator of Newey and West (1987).
13.7046
0.2498
0.3993
0.3811
and disag_ipca are negatively related and the esti-
(0.007)
[−2.185]
5

mated coefficients are statistically significant. In

16
turn, when there is an indication that the COPOM
Equation GMM

will reduce the Selic rate at its next meeting, the

12.8793
0.3779
0.3559
0.3361
4

general level of disagreement about inflation expecta-

17
tions increases, i.e., we found that d_down and dis-
13.6664
ag_ipca are positively related and the estimated
0.1888
0.3907
0.3722
3
Downloaded by [University of Sussex Library] at 12:16 22 September 2017

coefficients are statistically significant. Finally, when

15
joint effects are estimated, i.e., when the interaction
terms between the clarity of central bank communi-
13.4652
0.2640
0.4033
0.3852
2

cation and variables capturing monetary policy sig-

16

nalling (d_up*f_index and d_down*f_index) are taken

into consideration, the results show robust signals
14.4426
0.2095
0.3501
0.3355
1

and statistical significance.

15

These results are particularly interesting and

make sense when we consider the Brazilian economy
−0.01***

0.5898
0.5776
0.6574
0.4189
0.4942
0.6112
48.5259
0.0000
(0.003)
[−2.786]

during the inflation targeting period. Since Brazil

7

adopted the inflation targeting regime in 1999, only

in 2000, 2006, 2007 and 2009 the inflation rate was
0.014**

0.5757
0.5631
2.0284
0.1567
1.6304
0.1997
45.7893
0.0000
(0.006)
[2.304]

equal to or below its target. In other words, the

6

inflation rate was above its target – or even above

its upper limit – most of the time (see Table 5). In
−0.016**

0.5842
0.5718
1.3399
0.2491
1.1059
0.3339

0.0000
47.4123
(0.006)
[−2.557]

this sense, one should conjecture that, when agents

5

observe a hawkish central bank, they expect that

both inflation and inflation expectations will con-
Equation OLS

0.5893
0.5771
0.6235
0.4311
0.4250
0.6547
48.4239
0.0000

verge to the inflation target; as a consequence, dis-

4

agreement about inflation expectations decreases.

On the other hand, when agents observe a dovish
0.5754
0.5628
1.8035
0.1816
1.4223
0.2448
45.7388
0.0000

central bank, they realize that inflation will not con-

3

verge to the target due to the history of inflation

episodes in the country; indeed, the central bank will
0.5842
0.5719
1.4234
0.2350
1.0428
0.3553
47.4203
0.0000

have a hard time in making inflation and inflation

2

expectations converge to the target, thus disagree-

ment about inflation expectations actually increases.
With regard to the results shown in Table 4, the
0.5376
0.5274
9.1086
0.0030
7.5347
0.0008
52.7029
0.0000
1

estimated coefficients for the influence of inflation

Source: Authors’ estimates.
Table 3. (Continued).

volatility are all positive and statistically significant;

Prob. Ramsey RESET (1)

Prob. Ramsey RESET (2)

Variable: Disag_Ipca

this result does not depend on the specific regression

Ramsey RESET (1)

Ramsey RESET (2)

being estimated. Once again, these findings are com-

d_down*f_index

Prob. F-statistic

p-value(J-STAT)
d_sig*f_index

Adj R-squared
d_up*f_index
Dependent

patible with other results reported in the literature.

R-squared

F-statistic

Estimation results also suggest that more transpar-

J-STAT

RANK

ency reduces disagreement. Indeed, the coefficients

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Table 4. OLS and GMM regressions: influence of inflation volatility, transparency, subprime crisis, monetary policy signalling and clarity of central bank communication on disagreement (May
602

2003–March 2015).
Dependent Equation OLS Equation GMM
Variable:
Disag_Ipca 8 9 10 11 12 13 14 15 16 8 9 10 11 12 13 14 15 16
C −0.139 0.132 0.144 0.417 0.083 0.266 0.46 0.098 0.28 −0.332*** −0.12 −0.211 0.078 −0.245** −0.092 0.117 −0.239* −0.084 Coef
(0.193) (0.337) (0.341) (0.393) (0.282) (0.324) (0.404) (0.299) (0.334) (0.084) (0.152) (0.132) (0.153) (0.118) (0.114) (0.163) (0.121) (0.117) Std
Dev
[−0.718] [0.393] [0.423] [1.063] [0.294] [0.82] [1.138] [0.329] [0.84] [−3.94] [−0.789] [−1.597] [0.508] [−2.073] [−0.805] [0.719] [−1.977] [−0.715] T-stat
vol_ipca (−2) 0.208*** 0.25*** 0.236*** 0.204*** 0.236*** 0.217*** 0.202*** 0.241*** 0.221*** 0.436*** 0.397*** 0.45*** 0.41*** 0.432*** 0.42*** 0.414*** 0.455*** 0.436***
(0.077) (0.075) (0.077) (0.073) (0.069) (0.068) (0.072) (0.072) (0.070) (0.077) (0.061) (0.074) (0.076) (0.104) (0.093) (0.074) (0.090) (0.084)
G. C. MONTES ET AL.

[2.685] [3.345] [3.07] [2.797] [3.432] [3.181] [2.797] [3.325] [3.178] [5.676] [6.558] [6.118] [5.415] [4.17] [4.529] [5.59] [5.078] [5.174]
transp_BL −0.833*** −0.48* −0.649*** −0.449 −0.553** −0.675*** −0.456* −0.561** −0.78*** −0.536** −0.568** −0.427* −0.497** −0.589** −0.434* −0.505**
(0.302) (0.276) (0.247) (0.273) (0.262) (0.247) (0.272) (0.261) (0.166) (0.270) (0.253) (0.229) (0.233) (0.251) (0.229) (0.231)
[−2.761] [−1.74] [−2.628] [−1.645] [−2.109] [−2.733] [−1.679] [−2.151] [−4.689] [0] [−1.981] [−2.242] [−1.861] [−2.131] [−2.344] [−1.891] [−2.18]
transp_FL −1.068** −0.748 −0.794* −0.868 −0.863* −0.826* −0.863 −0.884* −0.725*** −0.344 −0.502** −0.558** −0.53** −0.541** −0.552** −0.545**
(0.483) (0.524) (0.476) (0.529) (0.499) (0.480) (0.542) (0.512) (0.217) (0.271) (0.221) (0.245) (0.229) (0.222) (0.249) (0.232)
[−2.209] [−1.429] [−1.667] [−1.642] [−1.73] [−1.722] [−1.593] [−1.727] [0] [−3.333] [−1.27] [−2.268] [−2.277] [−2.31] [−2.434] [−2.219] [−2.349]
d_subprime −0.889*** −0.635*** −0.72*** −0.896*** −0.827*** −0.898*** −0.904*** −0.791*** −0.874*** −1.024*** −0.852*** −0.925*** −1.023*** −0.951*** −1.001*** −1.038*** −0.912*** −0.983***
(0.138) (0.129) (0.134) (0.128) (0.125) (0.128) (0.133) (0.120) (0.124) (0.313) (0.262) (0.297) (0.255) (0.219) (0.236) (0.259) (0.230) (0.242)
[−6.432] [−4.92] [−5.361] [−6.999] [−6.635] [−7.037] [−6.816] [−6.616] [−7.069] [−3.275] [−3.249] [−3.118] [−4.013] [−4.338] [−4.232] [−4.005] [−3.964] [−4.057]
d_up −0.415* −0.419**
(0.236) (0.179)
[−1.758] [−2.348]
d_down 0.356 0.35**
(0.241) (0.144)
[1.48] [2.426]
d_sig −0.245* −0.198**
(0.142) (0.079)
[−1.724] [−2.497]
d_up*f_index −0.019* −0.018**
(0.010) (0.007)
[−1.862] [−2.386]
d_down*f_index 0.013 0.013**
(0.009) (0.006)
[1.386] [2.189]
d_sig*f_index −0.01* −0.008**
(0.006) (0.003)
[−1.729] [−2.396]
R-squared 0.2370 0.2555 0.2812 0.3320 0.3217 0.3393 0.3386 0.3107 0.3351 0.1622 0.2154 0.1984 0.2459 0.2353 0.2542 0.2507 0.2193 0.2455
Adj R-squared 0.2202 0.2391 0.2599 0.3071 0.2964 0.3146 0.3139 0.2850 0.3103 0.1434 0.1979 0.1743 0.2173 0.2063 0.2260 0.2223 0.1897 0.2170
Ramsey RESET (1) 3.5412 1.7026 2.2803 1.1505 2.9716 3.8650 1.1481 0.6939 2.4217
Prob. Ramsey RESET 0.0620 0.1942 0.1334 0.2854 0.0871 0.0514 0.2859 0.4063 0.1220
(1)
Ramsey RESET (2) 4.4245 1.7818 2.7260 1.8759 1.5804 1.9456 1.4764 1.1960 1.4348
Prob. Ramsey RESET 0.0138 0.1723 0.0691 0.1573 0.2098 0.1470 0.2322 0.3056 0.2418
(2)
F-statistic 14.0826 15.5579 13.2008 13.3209 12.7099 13.7614 13.7188 12.0798 13.5085
Prob. F-statistic 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
J-STAT 15.4410 14.7587 14.8239 13.5032 14.4740 14.2839 13.3886 14.4757 14.2351
p-value(J-STAT) 0.3487 0.3948 0.3185 0.3336 0.2715 0.2829 0.3414 0.2714 0.2860
RANK 18 18 18 18 18 18 18 18 18
Source: Authors’ estimates.
Notes: marginal significance levels: *** denotes 0.01, ** denotes 0.05 and *10%. SEs in parentheses and t-statistics in square brackets. Regarding OLS estimates, due to the problems of autocorrelation and heteroscedasticity
(Table A2 in Appendix A shows the residual diagnostics tests), the reported t-statistics in the OLS estimates are based on the estimator of Newey and West (1987).
 APPLIED ECONOMICS 603

Table 5. Observed inflation and inflation targets in Brazil. This article finds empirical evidence that trans-
Period Observed inflation Lower limit Upper limit Inflation target parency is an important tool to reduce disagreement
1999 8.9 6.0 10.0 8.0
2000 6.0 4.0 8.0 6.0
about inflation expectations in Brazil. Besides, given
2001 7.7 2.0 6.0 4.0 that we use the central bank transparency indices
2002 12.5 1.5 5.5 3.5
2003 9.3 - - 8.5 proposed by De Mendonça and Galveas (2013), our
2004 7.6 3.0 8.0 5.5 findings also suggest an interesting interpretation for
2005 5.7 2.0 7.0 4.5
2006 3.1 2.5 6.5 4.5 an inflation targeting economy: a stronger anchorage
2007 4.5 2.5 6.5 4.5 of both inflation and inflation expectations towards
2008 5.9 2.5 6.5 4.5
2009 4.3 2.5 6.5 4.5 the inflation target is an important attribute to
2010 5.9 2.5 6.5 4.5 reduce disagreement about inflation expectations.
2011 6.5 2.5 6.5 4.5
2012 5.8 2.5 6.5 4.5 Regarding monetary policy signalling and clarity
2013 5.9 2.5 6.5 4.5
2014 6.4 2.5 6.5 4.5
of central bank communication, our findings indi-
Source: Central Bank of Brazil. cate that the act of signalling future monetary policy
reduces disagreement. We also find that the act of
Downloaded by [University of Sussex Library] at 12:16 22 September 2017

signalling future monetary policy with clarity is also

attached to our proxies of transparency (variables
transp_bl and transp_fl) are always negative. They
are also statistically significant at conventional con-
fidence levels in most cases, although transp_fl seems
to exert a stronger effect on the general level of
disagreement than transp_bl. These findings also
suggest an interesting interpretation for inflation
targeting economies: a stronger anchorage of both
inflation and inflation expectations towards the
inflation target is an important tool to reduce dis-
agreement about inflation expectations.
Regarding the influence of both monetary policy
signalling and clarity of central bank communica-
tion on the general level of disagreement about
inflation expectations, results shown in Table 4
reinforce those presented in Table 3. As before,
the signs of the coefficients attached to (d_sig),
(d_sig*f_index), (d_up), (d_up*f_index), (d_down)
and (d_down*f_index) are the same as those
shown in Table 3. This finding highlights the
robustness of our results. The reasons discussed
before aiming at explaining estimation results
remain valid.
VII. Conclusion
This study has considered the main determinants of
the general level of disagreement about inflation
expectations in Brazil. In particular, this article has
studied to what extent central bank transparency,
communication and clarity have contributed to
match expectations formed by financial market
experts with the inflation target, thus reducing dis-
agreement about inflation expectations.
beneficial in terms of reducing disagreement about
future inflation. Moreover, when the COPOM indi-
cates that the basic interest rate will rise at its next
meeting, the general level of disagreement about
inflation expectations decreases. Finally, when there
is an indication that the COPOM will reduce the
basic interest rate at its next meeting, the general
level of disagreement about inflation expectations
increases.
Disclosure statement
No potential conflict of interest was reported by the authors.
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Appendix A
Table A1. Residual diagnostics tests for OLS regressions in Table 4.
1 2 3 4 5 6 7
LM(1) test 123.0828 112.8143 108.8228 111.9267 114.9318 107.7458 112.1813
Prob. LM(1) test 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
LM(2) test 73.6796 64.6128 61.6453 64.7445 66.0684 61.5634 65.3737
Prob. LM(2) test 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
ARCH(1) test 14.7649 52.3603 30.3789 47.1808 52.0632 29.0993 45.7315
Prob. ARCH(1) test 0.0002 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
ARCH(2) test 16.0784 35.3757 19.3962 29.1701 34.4245 18.7432 28.0041
Prob. ARCH(2) test 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
Jarque–Bera 34.3131 28.2288 44.4966 36.5035 24.5537 45.9958 34.5929
Prob. Jarque–Bera 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
Source: Author’s elaboration.

Table A2. Residual diagnostics tests for OLS regressions in Table 5.

8 9 10 11 12 13 14 15 16
LM(1) test 110.4410 122.4310 114.0613 111.4955 112.7258 115.7760 111.5495 111.4128 114.6062
Prob. LM(1) test 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
LM(2) test 66.3938 72.7633 68.9594 65.7888 67.2006 69.6301 65.7425 66.7225 69.0367
Prob. LM(2) test 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
ARCH(1) test 40.8035 24.9085 24.0806 26.1601 19.4206 23.3107 25.9026 20.3882 23.2024
Prob. ARCH(1) test 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
ARCH(2) test 62.3911 63.2047 54.1874 97.3991 59.1780 84.3874 102.8576 58.2380 83.0454
Prob. ARCH(2) test 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
Jarque–Bera 948.1691 606.9735 705.4177 651.9457 584.1525 591.4009 626.4915 635.0323 608.9114
Prob. Jarque–Bera 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000
Source: Author’s elaboration.
 Downloaded by [University of Sussex Library] at 12:16 22 September 2017

606

Table A3. Two step GMM regressions: influence of inflation, inflation volatility, subprime crisis, monetary policy signalling and clarity of central bank communication on disagreement
(May 2003–March 2015).
Dependent Equation two-step GMM Equation GMM
Variable: Disag_Ipca 1 2 3 4 5 6 7 1 2 3 4 5 6 7
G. C. MONTES ET AL.

C −1.5*** −1.673*** −1.98*** −2.037*** −1.665*** −2.023*** −2.076*** −1.5002 −1.6734 −1.9804 −2.0367 −1.6652 −2.0228 −2.0756
(0.347) (0.250) (0.453) (0.314) (0.252) (0.485) (0.390) 0.3466 0.2498 0.4529 0.3139 0.2519 0.4847 0.3899
[−4.329] [−6.7] [−4.373] [−6.488] [−6.612] [−4.173] [−5.323] −4.3288 −6.7002 −4.3727 −6.4879 −6.6117 −4.1731 −5.3232
inflation_ipca 0.182*** 0.242*** 0.229*** 0.279*** 0.24*** 0.234*** 0.282*** 0.1822 0.2420 0.2286 0.2789 0.2400 0.2338 0.2820
(0.065) (0.040) (0.067) (0.046) (0.041) (0.071) (0.063) 0.0645 0.0399 0.0667 0.0460 0.0406 0.0713 0.0627
[2.823] [6.064] [3.429] [6.059] [5.914] [3.279] [4.499] 2.8233 6.0638 3.4290 6.0589 5.9136 3.2787 4.4989
vol_ipca (−2) 0.173** 0.079* 0.089* 0.079* 0.083* 0.105* 0.062 0.1732 0.0790 0.0895 0.0792 0.0832 0.1055 0.0618
(0.075) (0.045) (0.053) (0.046) (0.047) (0.057) (0.038) 0.0751 0.0452 0.0528 0.0457 0.0474 0.0571 0.0380
[2.307] [1.747] [1.693] [1.734] [1.757] [1.846] [1.627] 2.3069 1.7466 1.6931 1.7336 1.7570 1.8462 1.6267
d_subprime −1.398** −1.618*** −1.358*** −1.62*** −1.629*** −1.327*** −1.395*** −1.3982 −1.6176 −1.3584 −1.6202 −1.6295 −1.3273 −1.3948
(0.675) (0.598) (0.391) (0.560) (0.608) (0.402) (0.393) 0.6748 0.5981 0.3907 0.5599 0.6077 0.4015 0.3933
[−2.072] [−2.705] [−3.477] [−2.894] [−2.681] [−3.305] [−3.546] −2.0721 −2.7045 −3.4770 −2.8936 −2.6814 −3.3054 −3.5461
d_up −0.357** −0.3574
(0.173) 0.1726
[−2.071] −2.0707
d_down 0.466* 0.4658
(0.214) 0.2481
[1.877] 1.8773
d_sig −0.219* −0.2186
(0.121) 0.1210
[−1.808] −1.8075
d_up*f_index −0.013** −0.0134
(0.007) 0.0066
[−2.026] −2.0258
d_down*f_index 0.02* 0.0203
(0.011) 0.0110
[1.851] 1.8510
d_sig*f_index −0.012*** −0.0122
(0.005) 0.0054
[−2.251] −2.2513
R-squared 0.3497 0.4012 0.3085 0.3786 0.3943 0.3084 0.4070 0.3497 0.4012 0.3085 0.3786 0.3943 0.3084 0.4070
Adj R-squared 0.3351 0.3831 0.2871 0.3597 0.3759 0.2870 0.3889 0.3351 0.3831 0.2871 0.3597 0.3759 0.2870 0.3889
J-STAT 13.6882 12.9338 13.5888 15.2040 12.9715 13.7727 13.0804 13.6882 12.9338 13.5888 15.2040 12.9715 13.7727 13.0804
p-value(J-STAT) 0.2507 0.3739 0.6293 0.3644 0.3711 0.6156 0.2192 0.2507 0.3739 0.6293 0.3644 0.3711 0.6156 0.2192
RANK 15 17 21 19 17 21 15 15 17 21 19 17 21 15
Source: Authors’ estimates.
Notes: marginal significance levels: *** denotes 0.01, ** denotes 0.05 and *10%. SEs in parentheses and t-statistics in square brackets.
 APPLIED ECONOMICS 607

Table A4. OLS and GMM regressions for the influence of inflation volatility, transparency, subprime crisis, monetary policy signalling
and clarity of central bank communication on disagreement about inflation expectations in Brazil (May 2003–March 2015).
Dependent Equation two-step GMM
8 9 10 11 12 13 14 15 16
C −0.422*** −0.264 −0.378** 0.019 −0.366** −0.165 0.051 −0.364** −0.151
(0.099) (0.254) (0.154) (0.242) (0.143) (0.153) (0.253) (0.147) (0.158)
[−4.257] [−1.04] [−2.457] [0.078] [−2.553] [−1.074] [0.202] [−2.479] [−0.956]
vol_ipca (−2) 0.436*** 0.36*** 0.433*** 0.377*** 0.342*** 0.336*** 0.382*** 0.371*** 0.357***
(0.076) (0.070) (0.072) (0.083) (0.092) (0.085) (0.080) (0.081) (0.079)
[5.758] [5.115] [5.997] [4.529] [3.71] [3.96] [4.767] [4.595] [4.518]
transp_BL −0.825*** −0.725** −0.664* −0.552* −0.643** −0.695** −0.566* −0.655**
(0.215) (0.354) (0.337) (0.326) (0.320) (0.326) (0.316) (0.307)
[−3.84] [−2.05] [−1.968] [−1.689] [−2.012] [−2.133] [−1.792] [−2.133]
transp_FL −0.578* −0.112 −0.45 −0.444 −0.433 −0.48 −0.432 −0.454
(0.346) (0.292) (0.315) (0.347) (0.338) (0.319) (0.340) (0.333)
[−1.67] [−0.383] [−1.427] [−1.279] [−1.282] [−1.503] [−1.271] [−1.362]
d_subprime −0.646* −0.734* −0.655* −0.75** −0.839*** −0.855*** −0.773** −0.793*** −0.831***
(0.375) (0.401) (0.370) (0.314) (0.264) (0.308) (0.322) (0.273) (0.311)
[−1.723] [−1.83] [−1.773] [−2.392] [−3.172] [−2.776] [−2.401] [−2.906] [−2.669]
d_up −0.492*
(0.279)
Downloaded by [University of Sussex Library] at 12:16 22 September 2017

[−1.761]
d_down 0.452**
(0.210)
[2.158]
d_sig −0.25**
(0.079)
[−2.1]
d_up*f_index −0.02*
(0.011)
[−1.774]
d_down*f_index 0.018**
(0.009)
[2.012]
d_sig*f_index −0.01**
(0.003)
[−2.082]
R-squared 0.0852 0.1922 0.1164 0.1729 0.1806 0.2075 0.1862 0.1675 0.2021
Adj R-squared 0.0646 0.1740 0.0897 0.1413 0.1493 0.1773 0.1551 0.1357 0.1716
J-STAT 14.9250 17.8599 15.5132 15.5781 17.1196 17.7233 15.5665 17.3990 17.7541
p-value(J-STAT) 0.5301 0.3322 0.4874 0.3398 0.5149 0.4740 0.3406 0.4959 0.4720
RANK 20 20 21 20 24 24 20 24 24
Source: Authors’ estimates. .
Notes: marginal significance levels: *** denotes 0.01, ** denotes 0.05 and *10%. SEs in parentheses and t-statistics in square brackets..

Appendix B
Table B1. Glossary of key words and expressions from minutes of COPOM meetings to build the dummy variables of monetary
policy signalling.
Dummy variable Key words
D_up – The monetary policy should remain especially vigilant.
– Maintenance of the interest rate represents a nonnegligible risk for meeting the target (projected inflation above target).
– Risks to achieving the goal.
– Potential inflationary impacts of supply shocks yet to materialize.
– Monetary policy should remain vigilant in order to avoid the propagation of shocks and exchange rate depreciation.
– Monetary policy firmly committed to meeting the inflation targets.
– Inflation remains high/monetary policy should be firm.
– The monetary authority will be ready to adopt an active posture if projected inflation diverges from the target.
– Inflation trend incompatible with the target.
– COPOM will need to be less tolerant if shocks threaten to raise inflation above the target. – The Central Bank will not allow
supply shocks to lead to an increase in the inflation rate.
– The committee understands that it is appropriate to continue the adjustment pace of the monetary conditions underway.
– The monetary authority must remain vigilant so that short-term pressures do not contaminate longer time horizon t – the
monetary authority should be ready to adjust the pace and magnitude of the interest rate
adjustment process to the circumstances
D_down – COPOM decided to continue the process of monetary easing. – Expected inflation below target/expectations consistent with the
inflation risks/targets are less significant. – Consolidation of favourable perspectives for inflation in the medium term/COPOM
considers that there is still room for further cuts in the Selic rate in the future. – Benign scenario for the evolution of inflation
(with reduction of uncertainties/favourable external scenario). – Economic activity consistent with supply conditions, with low
probability of inflation pressures.
● The gradual easing of the monetary stance will not compromise the important achievements made in lowering inflation
Source: Authors’ elaboration.