Extraction of inflation expectations from financial instruments in Latin America

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May 2018
Paper author(s): 
Alberto Fuertes
Ricardo Gimeno
José Manuel Marqués
Financial Economics

In this paper we estimate infl ation expectations for several Latin American countries using an affi ne model that takes as factors the observed infl ation and the parameters generated from zero-coupon yield curves of nominal bonds. By implementing this approach, we avoid the use of infl ation-linked securities, which are scarce in many of these markets, and obtain market measures of infl ation expectations free of any risk premium, eliminating potential biases included in other measures such as breakeven rates. Our method provides several advantages, as we can compute infl ation expectations at any horizon and forward rates such as the expected infl ation over the fi ve year period that begins fi ve years from today. We fi nd that infl ation expectations in the long-run are fairly anchored in Chile and Mexico, while those in Brazil and Colombia are more volatile and less anchored. We also fi nd that expected infl ation increases at longer horizons in Brazil and Chile, while it is decreasing in Colombia and Mexico.


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