Description

Central Bank policy decisions affect the economy not only by influencing market conditions through its market interventions but also by shaping the people’s expectations of economic conditions via the announcement of those decisions. This paper studies how forecasts of inflation and output growth respond to unexpected policy rate decisions using datasets for Brazil and Chile that satisfy three conditions: high enough frequency, short-term horizons, and the same source for the dependent and independent variables. The results show that inflation and output forecasts increase in the short run after an unexpected increase in the policy rate, which supports the existence of an information shock behind the monetary policy decision. These results can be explained by a baseline Neo-Keynesian model only when the interest rate provides information about shocks other than the monetary policy shock.