The Macroeconomic Determinants of the Term Structure of Inflation Expectations in Brazil

Marcelo Fernandes and Eduardo Thiele

Brazilian Review of Econometrics, 2015, vol. 35, issue 1

Abstract: This paper aims to analyze the dynamics of inflation expectations according to macroeconomics conditions. To this end, we extract the expected inflation curve implied by indexed bonds and then estimate a dynamic factor model. The factors corresponds to the level, slope and curvature of the term structure, varying over time as a function of the exchange rate, inflation, commodities index and the CDS-implied Brazil risk. A standard deviation shock in the exchange rate increases inflation more in the short and long terms than in the medium run. The same pattern arises in the presence of a shock in inflation. A shock in commodity prices increases inflation mostly in the short term, stabilizing notwithstanding at a higher level than the original curve. In contrast, a shock in the CDS shifts down the expected inflation curve in a virtually parallel manner.

Date: 2015
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