Uncertainty, credibility and monetary policy in Brazil: A BVAR approach with sign restrictions

This paper examines how uncertainty and monetary policy credibility affect economic activity and inflation expectations in Brazil. We use Bayesian Vector Autoregression (BVAR) models with sign restrictions to identify structural shocks, based on monthly data from 2003 to 2022. The results indicate that an uncertainty shock generates inflationary pressures and contractionary effects on productive activity. In contrast, an increase in the credibility indicator leads to higher output growth rates and lower inflation. Additionally, our model shows that uncertainty and credibility do not significantly affect each other, suggesting a limited interaction between macroeconomic uncertainty and the perceived credibility of the Brazilian Central Bank's monetary policy over the analyzed sample.