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Break-Even-Inflation's Decomposition in Mexico

Author

Listed:
  • Aguilar-Argaez Ana María
  • Elizondo Rocío
  • Roldán-Peña Jessica

Abstract

This document studies the recent evolution of the break-even-inflation implicit in the yields of long-term financial instruments in Mexico. In particular, it analyzes the dynamics of its main components: the long-run inflation expectation and the inflationary risk premium, which are estimated by means of an affine term structure model of interest rates. The results show that the gradual reduction registered in such compensation in the last years is the result of the decrease showed by both components. This reflects, on the one hand, the progressive convergence of the estimated inflation expectation to Banco de México's inflation target as well as its anchoring and, on the other hand, that nominal-bond holders have required a lower hedging against future inflation, possibly, as a reflection of a lower risk perception associated to it.

Suggested Citation

  • Aguilar-Argaez Ana María & Elizondo Rocío & Roldán-Peña Jessica, 2016. "Break-Even-Inflation's Decomposition in Mexico," Working Papers 2016-22, Banco de México.
    • Handle: RePEc:bdm:wpaper:2016-22
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    References listed on IDEAS

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    More about this item

    Keywords

    Inflation; Break-even-inflation; Inflation expectation; Inflationary risk premium;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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