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Decomposing nominal and real yield curves and inflation forecasting: Evidence from Brazil

Author

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  • Caldeira, João F.
  • Cordeiro, Werley C.

Abstract

This study decomposes the breakeven inflation rate (BEIR) into inflation expectations (IE) and the inflation risk premium (IRP) using an arbitrage-free affine term structure model to jointly estimate nominal and real yield curves for the Brazilian economy. The findings suggest: (i) the IRP increases with maturity and shows a moderate positive correlation with Brazilian Credit Default Swap (CDS), and (ii) IE improve the accuracy of inflation forecasts from market participant surveys for long horizons. These results reveal a new dimension to improve the central bank’s assessment of inflation expectation anchoring.

Suggested Citation

  • Caldeira, João F. & Cordeiro, Werley C., 2026. "Decomposing nominal and real yield curves and inflation forecasting: Evidence from Brazil," Economics Letters, Elsevier, vol. 258(C).
    • Handle: RePEc:eee:ecolet:v:258:y:2026:i:c:s016517652500549x
    DOI: 10.1016/j.econlet.2025.112712
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    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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