Are long-term inflation expectations well-anchored in Brazil, Chile, and Mexico?

Available from: 
October 2013
Paper author(s): 
Michiel De Pooter (Federal Reserve Board)
Patrice Robitaille (Federal Reserve Board)
Ian Walker (Federal Reserve Board)
Michael Zdinak (Federal Reserve Board)
Topic: 
Macroeconomics - Economic growth - Monetary Policy
Year: 
2013


We examine whether long-term inflation expectations are well-anchored in Brazil, Chile, and Mexico, employing survey and market-based measures of long-term inflation expectations. For each country, we construct a daily time-series for far forward inflation compensation, a reading of investors’ views on the outlook for inflation in the far future, from sovereign bond prices. For Chile and Mexico, survey measures have tracked these countries’ inflation target quite well. In contrast, survey-based measures of medium- and long-term inflation expectations for Brazil have been moving up in recent years. For all three countries, far forward inflation compensation is volatile and regularly deviates from the inflation target. We then use our daily inflation compensation measures in an event study, regressing daily changes in inflation compensation on news surprises of monetary policy, prices, and the real economy. Far-forward inflation compensation does not significantly react to domestic news surprises, but does react to some U.S. and Chinese news surprises. Subsample analysis shows that inflation expectations have become better anchored predominantly in recent years. Overall, we argue that it may be too premature to conclude that long-term inflations expectations in Brazil, Chile and Mexico have become well-anchored.

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Research section: 
Lacea 2013 annual meeting
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