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Decomposing Long-Term Interest Rates: An International Comparison

Listed author(s):
  • Luis Ceballos
  • Damián Romero

This work analyzes the behavior of long-term interest rates for several economies, identifying the risk neutral and term premium components under different methodologies. With this, we analyze which of these two channels affected interest rate movements in different monetary policy regimes. Also, we quantify the transmission of US long-term yield to others economies using the spillovers index proposed by Diebold & Yilmaz (2009). We find that movements in long-term interest rates (respect to the pre-crisis period 2003-2007) in different monetary policy regimes are related to changes in the term premium for most countries. Also, our findings suggest a heterogeneous behavior in the US to other economies. In developed economies, long-term interest rates are affected in both components (risk neutral and term premium) mainly through the US risk-neutral channel; whereas in developing countries, the evidence suggests that the relevant transmission channel is the term premium which is affected by US term premium.

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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 767.

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Date of creation: Sep 2015
Handle: RePEc:chb:bcchwp:767
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  1. Georgiadis, Georgios, 2016. "Determinants of global spillovers from US monetary policy," Journal of International Money and Finance, Elsevier, vol. 67(C), pages 41-61.
  2. repec:sbe:breart:v:34:y:2014:i:2:a:48700 is not listed on IDEAS
  3. Luis Ceballos & Alberto Naudon & Damián Romero, 2016. "Nominal term structure and term premia: evidence from Chile," Applied Economics, Taylor & Francis Journals, vol. 48(29), pages 2721-2735, June.
  4. Scott Joslin & Kenneth J. Singleton & Haoxiang Zhu, 2011. "A New Perspective on Gaussian Dynamic Term Structure Models," Review of Financial Studies, Society for Financial Studies, vol. 24(3), pages 926-970.
  5. Michael D. Bauer & Glenn D. Rudebusch & Jing Cynthia Wu, 2012. "Correcting Estimation Bias in Dynamic Term Structure Models," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 30(3), pages 454-467, April.
  6. Juan Andrés Espinosa Torres & Luis Fernando Melo Velandia & José Fernando Moreno Gutiérrez, 2014. "Estimación de la prima por vencimiento de los TES en pesos del gobierno colombiano," Borradores de Economia 854, Banco de la Republica de Colombia.
  7. Nowak, Sylwia & Andritzky, Jochen & Jobst, Andreas & Tamirisa, Natalia, 2011. "Macroeconomic fundamentals, price discovery, and volatility dynamics in emerging bond markets," Journal of Banking & Finance, Elsevier, vol. 35(10), pages 2584-2597, October.
  8. Michael D. Bauer & Glenn D. Rudebusch & Jing Cynthia Wu, 2014. "Term Premia and Inflation Uncertainty: Empirical Evidence from an International Panel Dataset: Comment," American Economic Review, American Economic Association, vol. 104(1), pages 323-337, January.
  9. Ang, Andrew & Piazzesi, Monika, 2003. "A no-arbitrage vector autoregression of term structure dynamics with macroeconomic and latent variables," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 745-787, May.
  10. Aït-Sahalia, Yacine & Andritzky, Jochen & Jobst, Andreas & Nowak, Sylwia & Tamirisa, Natalia, 2012. "Market response to policy initiatives during the global financial crisis," Journal of International Economics, Elsevier, vol. 87(1), pages 162-177.
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