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

João Caldeira () and Luiz Furlani ()
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João Caldeira: Federal University of Rio Grande do Sul
Luiz Furlani: Federal University of Rio Grande do Sul and Banco Sicredi

Economics Bulletin, 2011, vol. 31, issue 2, 1379-1390

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.

Keywords: break-even inflation rate; inflation expectations; inflation (search for similar items in EconPapers)
JEL-codes: E0 E4 (search for similar items in EconPapers)
Date: 2011-05-12
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