Output‐inflation and unemployment‐inflation trade‐offs under inflation targeting

Abstract

Purpose This article aims to analyze if the adoption of inflation targeting in Brazil contributed to an improvement in the conduction of monetary policy capable of increasing credibility and reducing inflation without an increase in the sacrifice rate. Design/methodology/approach Considering the Brazilian experience, this article estimates, through GMM and VAR methods, the offsetting effects of a monetary policy change on the output‐inflation and unemployment‐inflation trade‐offs. Findings The findings denote that the disinflationary process implemented in Brazil, after the adoption of inflation targeting, is not associated with the emergence of the above‐mentioned trade‐offs. Furthermore, the development of credibility in the conduction of monetary policy is an important element responsible for the achievement of this result. Practical implications Development of credibility is an important strategy for improving the conduction of the monetary policy. Originality/value The results of the paper give some new insights about the conduction of monetary policy for developing countries, which have adopted inflation targeting.

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