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Disagreement in Inflation Forecasts and Inflation Risk Premia in Brazil

Brazilian Review of Econometrics

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Title Disagreement in Inflation Forecasts and Inflation Risk Premia in Brazil
 
Creator Nunes, Clemens Vinicius; São Paulo School of Economics EESP-FGV
Doi, Jonas; Verde Asset Management
Fernandes, Marcelo; São Paulo School of Economics EESP-FGV
 
Subject break-even inflation, risk premia, survey expectations
E31, E43, E44.
 
Description The aim of this study is to investigate the link between the inflation uncertainty and the inflation risk premia implied by the term structures of nominal and real interest rates in Brazil. We gauge the latter by the difference between the breakeven inflation rate and agents’ inflation median expectations in the Focus Survey published by the Central Bank of Brazil. To proxy for inflation uncertainty, we employ the standard deviation of the 12-month inflation expectations in the Focus Survey. We first estimate the impact of inflation uncertainty on the inflation risk premia across different horizons using a VAR approach. We find that shocks in inflation uncertainty significantly affect the 9-, 12-, 24- and 36-month inflation risk premia. The impact is positive, increasing with maturity at least up to 12 months. We then estimate an alternative VAR specification that summarizes the term structure of inflarion risk premia by means of level, slope and curvature factors. It turns out that shocks in inflation uncertainty do not affect the slope and curvature factors, resulting only in parallel shifts in the inflation premium term structure. This is in line with the fact that the higher the inflation uncertainty, the higher is the compensation that investors will require to hold fixed rate bonds. 
 
Publisher Sociedade Brasileira de Econometria
 
Contributor The authors are grateful to Ricardo Brito for valuable comments. Fernandes thanks the financial support provided by CNPq (PQ 302272/2014-3) and by FAPESP
 
Date 2017-05-25
 
Type info:eu-repo/semantics/article
info:eu-repo/semantics/publishedVersion
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Format application/pdf
 
Identifier http://bibliotecadigital.fgv.br/ojs/index.php/bre/article/view/57700
10.12660/bre.v37n12017.57700
 
Source Brazilian Review of Econometrics; Vol 37, No 1 (2017); 45-59
Brazilian Review of Econometrics; Vol 37, No 1 (2017); 45-59
1980-2447
 
Language eng
 
Relation http://bibliotecadigital.fgv.br/ojs/index.php/bre/article/view/57700/66412
 
Rights Copyright (c) 2017 Brazilian Review of Econometrics