Break-Even Inflation Rate and the Risk Premium

Download or read book Break-Even Inflation Rate and the Risk Premium written by João Caldeira and published by . This book was released on 2013 with total page 12 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.