Series: Working Papers. 1819.
Author: Alberto Fuertes, Ricardo Gimeno and José Manuel Marqués.
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Abstract
In this paper we estimate inflation expectations for several Latin American countries using
an affine model that takes as factors the observed inflation and the parameters generated
from zero-coupon yield curves of nominal bonds. By implementing this approach, we avoid
the use of inflation-linked securities, which are scarce in many of these markets, and obtain
market measures of inflation 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 inflation expectations at any horizon and forward rates
such as the expected inflation over the five year period that begins five years from today.
We find that inflation 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 find that
expected inflation increases at longer horizons in Brazil and Chile, while it is decreasing in
Colombia and Mexico.