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Extracting inflation risk premium from nominal and real bonds using survey information

José Vicente (Banco Central do Brasil, Rio de Janeiro, Brazil)
Daniela Kubudi (Fundacao Getulio Vargas, Rio de Janeiro, Brazil)

Journal of Economic Studies

ISSN: 0144-3585

Article publication date: 14 May 2018

Issue publication date: 14 May 2018

289

Abstract

Purpose

The purpose of this paper is to forecast future inflation using a joint model of the nominal and real yield curves estimated with survey data. The model is arbitrage free and embodies incompleteness between the nominal and real bond markets.

Design/methodology/approach

The methodology is based on the affine class of term structure of interest rate. The model is estimated using the Kalman filter technique.

Findings

The authors show that the inclusion of survey data in the estimation procedure improves significantly the inflation forecasting. Moreover, the authors find that the monetary policy has significant effects on the inflation expectation and risk premium.

Originality/value

This paper is the first to estimate inflation using a joint model of nominal and real yield curves with Brazilian data. Moreover, the authors propose a simple arbitrage-free model that takes it account incompleteness between the nominal and real bond markets.

Keywords

Acknowledgements

The authors would like to thank Ricardo Reis, Caio Ibsen Almeida and Gustavo Silva Araújo for their comments and participants at XIX Annual Inflation Targeting Seminar of Central Bank of Brazil. The views expressed are those of the authors and do not necessarily reflect the views of the Central Bank of Brazil.

Citation

Vicente, J. and Kubudi, D. (2018), "Extracting inflation risk premium from nominal and real bonds using survey information", Journal of Economic Studies, Vol. 45 No. 2, pp. 307-325. https://doi.org/10.1108/JES-03-2017-0066

Publisher

:

Emerald Publishing Limited

Copyright © 2018, Emerald Publishing Limited

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