CENTRAL BANK COMMUNICATION, INFLATION EXPECTATIONS AND SELF-FULFILLING PROPHECY: EVIDENCES FOR BRAZIL

Abstract

Studies on Central Bank communication, in emerging countries, are still scarce. There are no studies for the Brazilian case about the influence of communication on inflation expectations and therefore on inflation. Therefore, this paper analyzes the influence of the communication of the Brazilian monetary authority on inflation expectations and on inflation and, thus, aims to verify whether such communicates of the monetary authority have a character of self-fulfilling prophecy. The study contributes to the literature since it develops – using the theory of fuzzy sets – a new index of communication, and identifies a paradoxical situation here called the “paradox of communication”. The results suggest that the central bank’s communication is able to present an adverse effect on inflation expectations and on inflation itself when it states the possibility of losing control of inflation.