FREQUENCY OF CENTRAL BANK EVALUATION IN AN INFLATION TARGETING REGIME: THE BRAZILIAN EXPERIENCE

Paulo Springer de FREITAS (Central Bank of Brazil and University of Brasilia)

The paper analyses the optimal frequency for Central Bank evaluation in an inflation-targeting regime, applied to the Brazilian economy. Setting a frequency of accountability is an important issue in the design of an inflation-targeting regime, since it allows the matching of conflicting goals between the monetary authority and the government: while the government cares about inflation and employment, the Central Bank should be concerned only about inflation. Through stochastic simulations, it was possible to conclude that the Central Bank should be evaluated every two or three years. However, there are little losses involved in the current Brazilian regime, where the Central Bank is evaluated in the end of every calendar year. Only in case of very frequent evaluations, like at every two quarters, the social welfare loss would be significant, with high output gap and inflation variances.