Analysing credibility in high-inflation countries: a new approach

This paper describes a new, simple procedure for estimating the size and diffusion of credibility effects in the context of stabilisation policies in high-inflation countries. As an applied example, examines the Cruzado Plan implemented in Brazil during 1986. The method relies on a decomposition of the parallel foreign exchange market premium into a "fundamental' component (the part which is correlated with the market fundamentals) and a "non-fundamental' component (the part which is orthogonal to the market fundamentals). It is the latter, "non-fundamental; component which may be used as a "credibility variable' and which will be negatively correlated with the degree of inflation persistence. -from Authors