Fiscal credibility and disagreement in expectations about inflation: evidence for Brazil

The present paper analyzes the impact of fiscal credibility on the disagreement in expectations about inflation. We argue that when fiscal credibility is low (high), the uncertainty related to the future behavior of inflation (measured by the disagreement in expectations) is higher (lower). The contributions of our study are twofold. First, we use market expectations reported by the Central Bank of Brazil to build a new fiscal credibility index. This new index takes into account the expectations related to the fiscal effort required to keep gross public debt in a sustainable level. Second, we analyze the influence of fiscal credibility on the disagreement in expectations about inflation. Evidence suggests fiscal credibility is important to reduce the disagreement in expectations about inflation. Thus, the findings indicate that, since fiscal credibility helps reducing the disagreement in expectations, it helps in the process of anchoring inflation expectations, providing better results for the inflation targeting regime.