Market Forecasts in Brazil: performance and determinants

This paper assesses a wide set of aspects of market forecasts in Brazil: rationality, predictive power, joint performance, epidemiology and determinants. Using the survey conducted by the Central Bank of Brazil (CBB) among professional forecasters during the inflation targeting period, the main results are as follows: i) credibility in Brazilian monetary policy has increased over time, since inflation targets are important to explain inflation expectations, and private agents perceive the CBB as following a Taylor-type rule that is consistent with the inflation targeting framework; ii) market inflation forecasts had similar or better forecast performance than ARMA-, VAR- and BVAR-based forecasts with standard information sets; iii) the joint performance of market forecasts has improved over the past years; iv) in the decomposition of forecast errors for inflation, interest rate and exchange rate, the common forecast error component prevails over the idiosyncratic component across survey respondents; v) top-five forecasters published by the CBB are influential in other respondents’ forecasts; vi) inflation forecasts are unbiased but not fully efficient; and vii) inflation forecast uncertainty is positively related to increasing inflation and to country-risk premium.