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Break-even inflation rate and the risk premium: an alternative approach to the VAR models in forecasting the CPI

Author

Listed:
  • João Caldeira

    (Federal University of Rio Grande do Sul)

  • Luiz Furlani

    (Federal University of Rio Grande do Sul and Banco Sicredi)

Abstract

This paper examines, for the Brazilian case, if break-even inflation rates (BEIR) extracted from fixed income securities are an unbiased estimator of consumer inflation, measured by the CPI. Our estimates suggest that BEIRs are informative about future inflation, especially for the maturity of three months. The main innovation of our work, however, is the method used for estimation, allowing us to conclude that the inflation risk premium, for some maturities considered, varies over time and is not irrelevant from the economic standpoint. We also compared the inflation forecasts obtained from BEIRs with the ones extracted from VAR models used by Central Bank and estimates from the Focus Survey Report's Top5s. The forecasts performed with BEIRs showed greater accuracy than those extracted from VAR models. These projections, however, underperformed those from the Top5s.

Suggested Citation

  • João Caldeira & Luiz Furlani, 2011. "Break-even inflation rate and the risk premium: an alternative approach to the VAR models in forecasting the CPI," Economics Bulletin, AccessEcon, vol. 31(2), pages 1379-1390.
    • Handle: RePEc:ebl:ecbull:eb-11-00237
    as

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    References listed on IDEAS

    as
    1. Joseph G. Haubrich & George Pennacchi & Peter H. Ritchken, 2008. "Estimating real and nominal term structures using Treasury yields, inflation, inflation forecasts, and inflation swap rates," Working Papers (Old Series) 0810, Federal Reserve Bank of Cleveland.
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    More about this item

    Keywords

    break-even inflation rate; inflation expectations; inflation;
    All these keywords.

    JEL classification:

    • E0 - Macroeconomics and Monetary Economics - - General
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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