An analysis of the yield spread as a predictor of inflation in Brazil: Evidence from a wavelets approach

Authors:
Benjamin Miranda Tabak;Mateus A. Feitosa
Affiliations:
Banco Central do Brasil, DEPEP, 70074-900 Brasilia, DF, Brazil;Department of Business Administration, Universidad Carlos III de Madrid, C/Madrid 126, 28903, Getafe, Spain
Venue:
Expert Systems with Applications: An International Journal
Year:
2009

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Abstract

In the present paper we apply multiresolution decomposition in order to test if the Brazilian yield spread has informational content in the prediction of inflation. Additionally, we investigate the effect of the implementation of inflation targeting regime over this relation. The results suggest that the predictive power of the spread varies across time patterns. Inasmuch, the results indicate that the implementation of the inflation target regime was a sine qua non condition for a substantial increase in the predictive power of inflation. Overall, results suggest that wavelets transformations may be very useful in the building of forecasts of important financial variables.