The Macroeconomic Determinants of the Term Structure of Inflation Expectations in Brazil*

This paper aims to analyze the dynamics of inflation expectations according to macroe-conomics conditions. To this end, we extract the expected inflation curve implied by indexed bonds and then estimate a dynamic factor model. The factors corresponds to the level, slope and curvature of the term structure, varying over time as a function of the exchange rate, inflation, commodities index and the CDS-implied Brazil risk. A one standard deviation shock to the exchange rate increases inflation more in the short and long ends of term structure than in the medium run. The same pattern arises after a shock to inflation. A shock to commodity prices increases inflation mostly in the short term, stabilizing at a higher level than the original curve. In contrast, a shock to the CDS shifts down the expected inflation curve in a virtually parallel manner