Are Long-Term Inflation Expectations Well Anchored in Brazil, Chile, and Mexico?
by Michiel De Pooter, Patrice Robitaille, Ian Walker, and Michael Zdinak
Federal Reserve Board of Governors
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
financial-market-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 long-term 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.
JEL Codes: D84, E31, E43, E44, E52, E58, G14.
Full article (PDF, 64 pages, 1244 kb)
Discussion by Refet S. Gürkaynak