Moisés Cardoso Martins

This paper aims estimating a reaction function for the Central Bank of Brazil (BCB) from 2001 to 2019 under the credibility scope, in a forward-looking perspective. The objective is demonstrating a relationship between fiscal and monetary policy, and, establishes a variable that represents market expectations and credibility regarding the monetary authority's ability to achieve their goals. Then, a reaction function for the BCB was estimated, using the methodology of autoregressive vectors (VAR) and structural autoregressive vectors (SVAR), obtaining the short-term and long-term relationships, respectively. The classic variables of the reaction functions were used, such as the inflation expectation, the inflation deviation from its target, the real GDP gap and the variation of the effective real exchange rate. Considering the interest rate variation, they were all significant and had expected signs. Also, the calendar effect was observed. In addition, the fiscal variable was represented by the market expectations of the public sector´s budget deficit. This variable was significant, demonstrating that monetary authority reacts to market confidence over its acts.