New macroeconomic consensus and inflation targeting: Monetary Policy Committee directors’ turnover in Brazil

The main objective of this paper is to estimate a Central Bank reaction function that accounts for the effects of directors’ rotation of the Brazilian COPOM (Monetary Policy Committee). The reaction function proposed is assumed to be the mechanism for inflation targeting policy. It accounts for the COPOM rotation to examine COPOM's policy credibility. The empirical analysis use monthly data from 2001 to 2008 to estimate a structural vector auto-regression (SVAR) in order to learn about the long run effects. The SVAR results suggest that the turnover of the COPOM board of directors affects inflation expectation and interest rate of the Brazilian economy in the long run. This means that the turnover causes economic agents to increase their expectations about inflation, resulting in increases of the rate of change of the interest rate level. This break in credibility leads to an additional cost to society through higher future interest rates to be paid by government bonds.