Extraction%20of%20Inflation%20Expectations%20from%20Financial%20Instruments

Working Papers

Extraction of Inflation Expectations from Financial Instruments


CODE: IDB-WP-898
AUTHOR(s): Fuertes, Alberto , Gimeno, Ricardo , Marqués, José Manuel
PUBLISHED: June 2018
LANGUAGE: English
RELATED TOPICS: Macroeconomics
DOWNLOAD FILE IN: English

Abstract:

This paper estimates inflation expectations for several Latin American countries using an affine model that takes as factors observed inflation and parameters generated by zero-coupon yield curves of nominal bonds. Implementing this approach avoids the use of inflation-linked securities, which are scarce in many of these markets. Market measures of inflation expectations free of any risk premium are thus obtained, eliminating potential biases included in other measures such as break-even rates. This method provides several advantages, such as making it possible to compute inflation expectations at any horizon and forward rates such as the expected inflation over the five-year period that begins five years from today. It is found that inflation expectations in the long run are fairly anchored in Chile and Mexico, while those in Brazil and Colombia are more volatile and less anchored. It is also found that expected inflation increases at longer horizons in Brazil and Chile, while it decreases in Colombia and Mexico.

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