Abrupt Monetary Policy Change and Unanchoring of Inflation Expectations

Inflation expectations can quickly become unanchored if the central bank undermines its commitment to the inflation target. This paper exploits a sudden change in monetary policy by the Brazilian Central Bank in 2011 and microdata from a daily survey of professional forecasters to establish support for this claim. Reanchoring came only years later, after a regime shift that included a change of government. A simple model with a well-defined concept of (un)anchored inflation expectations makes sense of and offers a structural interpretation of our empirical findings.