Are Long-Term Inflation Expectations Well Anchored in Brazil, Chile and Mexico?

Abstract

In this paper, we consider whether long-term inflation expectations have become better anchored in Brazil, Chile, and Mexico. We do so using survey-based measures as well as financialmarket-based measures of long-term inflation expectations, where we construct the market-based measures from daily prices on nominal and inflation-linked bonds. This paper is the first to examine the evidence from Brazil and Mexico, making use of the fact that markets for longterm government debt have become better developed over the past decade. We find that inflation expectations have become much better anchored over the past decade in all three countries, as a testament to the improved credibility of the central banks in these countries when it comes to keeping inflation low. That said, one-year inflation compensation in the far future displays some sensitivity to at least one macroeconomic data release per country. However, the impact of these releases is small and it does not appear that investors systematically alter their expectations for inflation as a result of surprises in monetary policy, consumer prices, or real activity variables. Finally, long-run inflation expectations in Brazil appear to have been less well anchored than in Chile and Mexico.

Inflation targeting and term premia estimates for Latin America

“…Our analysis cannot prove by itself that inflation targeting has been the main driver of improved economic conditions. There have been a number of complementary recent studies analyzing Latin American term structures such as De Pooter et al (2014), Ceballos et al (2014), and Guarn et al (2014) which are consistent with our findings and the hypothesis that improved monetary policy has at least partly been the cause. De Pooter et al (2014) in particular show that Latin American inflation expectations are strongly anchored.…”

“…There have been a number of complementary recent studies analyzing Latin American term structures such as De Pooter et al (2014), Ceballos et al (2014), and Guarn et al (2014) which are consistent with our findings and the hypothesis that improved monetary policy has at least partly been the cause. De Pooter et al (2014) in particular show that Latin American inflation expectations are strongly anchored. As Ellingsen and Söderström (2001) discuss, long-run nominal rates reflect expected policy rates, term premia and inflation expectations.…”

Inflation Expectations: Review and Evidence

“…However, swap markets in EMDEs are typically insufficiently developed to allow such a measure to be reliably extracted. Therefore, central banks in several large EMDEs (for example, Brazil, Chile, Colombia, Mexico, Peru, Poland, the Russian Federation, South Africa, Thailand, and Turkey) typically derive their market-based measures of inflation expectations from inflation-indexed government bonds (Sousa and Yetman 2016;De Pooter et al 2014).…”

Measuring Inflation Anchoring and Uncertainty: A U.S. and Euro Area Comparison

“…There are several proposed measures of anchoring, or stability of inflation expectations. One popular measure is the response of inflation compensation measures (e.g., TIPS breakeven rates or inflation swaps) or interest rates to incoming macroeconomic news (Gürkaynak et al 2007, Mishkin 2007, Beechey, Johannsen, and Levin 2011, De Pooter et al 2014, Speck 2016. Other measures include the response of (changes in) long-term inflation expectations to (changes in) short-term ones (Buono andFormai 2016, Gerlach, Moessner, andRosenblatt 2017), the precision around estimates of the level of inflation (Mehrotra and Yetman 2014), the volatility of shocks to trend inflation (Mertens 2016), and the closeness of average beliefs to the central bank's inflation target (Kumar et al 2015, Łyziak andPaloviita 2016).…”