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Monetary Policy and Long-Term Interest Rates in Chile

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Author Info
Mauricio Larraín
Abstract

This paper estimates the short-run reaction of an emerging financial market to monetary policy surprises. Using forward curve data to obtain the surprise component of policy decisions, we estimate the effects of a monetary shock on long-term nominal and real interest rates in Chile. Our results indicate that while the response of nominal interest rates is strongly positive and significant, the response of real rates is small and mostly insignificant. We also find that the response of Chilean interest rates is quite smaller than the one found in the international literature. Finally, we find that inflation compensation (the difference between nominal and real rates) is largely invariant to policy shocks, which suggests that the inflation targeting framework in Chile has been successful in anchoring inflation expectations to the target.

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 335.

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Date of creation: Nov 2005
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Handle: RePEc:chb:bcchwp:335

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  1. Refet Gurkaynak & Brian Sack & Eric Swanson, 2005. "Do Actions Speak Louder than Words? The Response of Asset Prices to Monetary Policy Actions and Statements," Macroeconomics 0504013, EconWPA. [Downloadable!]
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  2. Ellingsen, Tore & Söderström, Ulf, 2004. "Why are Long Rates Sensitive to Monetary Policy?," CEPR Discussion Papers 4360, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  3. Refet Gürkaynak & Brian Sack, 2005. "Do Actions Speak Louder Than Words?The Response of Asset Prices to Monetary Policy Actions and Statements," Computing in Economics and Finance 2005 323, Society for Computational Economics.
  4. Rigobon, Roberto & Sack, Brian, 2004. "The impact of monetary policy on asset prices," Journal of Monetary Economics, Elsevier, vol. 51(8), pages 1553-1575, November. [Downloadable!] (restricted)
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  5. Monika Piazzesi, 2002. "The Fed and Interest Rates - A High-Frequency Identification," American Economic Review, American Economic Association, vol. 92(2), pages 90-95, May. [Downloadable!]
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  6. Refet S. Gürkaynak & Andrew T. Levin & Andrew N. Marder & Eric T. Swanson, 2006. "Inflation Targeting and the Anchoring of Inflation Expectations in The Western Hemisphere," Working Papers Central Bank of Chile 400, Central Bank of Chile. [Downloadable!]
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  7. Kuttner, Kenneth N., 2001. "Monetary policy surprises and interest rates: Evidence from the Fed funds futures market," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 523-544, June. [Downloadable!] (restricted)
    Other versions:
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