Break-Even Inflation Rate and the Risk Premium: An Alternative Approach to the VAR Models in Forecasting the CPI

12 Pages Posted: 8 Jul 2013

See all articles by João Caldeira

João Caldeira

Universidade Federal de Santa Catarina & CNPq

Luiz Furlani

Independent

Date Written: April 2011

Abstract

This paper examines, for the Brazilian case, if break-even inflation rates (BEIR) extracted from fixed income securities is 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.

Keywords: break-even inflation rate, inflation expectations, inflation

JEL Classification: E31, E43, E44

Suggested Citation

Caldeira, João and Furlani, Luiz, Break-Even Inflation Rate and the Risk Premium: An Alternative Approach to the VAR Models in Forecasting the CPI (April 2011). Available at SSRN: https://ssrn.com/abstract=2290408 or http://dx.doi.org/10.2139/ssrn.2290408

João Caldeira (Contact Author)

Universidade Federal de Santa Catarina & CNPq ( email )

R. Eng. Agronômico Andrei Cristian Ferreira, s/n
Florianópolis, SC Rio Grande do Sul 90480-004
Brazil

Luiz Furlani

Independent ( email )

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