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A Post-Pandemic New Normal for Interest Rates in Emerging Bond Markets? Evidence from Chile

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Before the COVID-19 pandemic, researchers intensely debated the extent of the decline in the steady-state short-term real interest rate—the so-called equilibrium or natural rate of interest. Given the recent sharp increase in interest rates, we revisit this question in an emerging bond market context and offer a Chilean perspective using a dynamic term structure finance model estimated directly on the prices of individual Chilean inflation indexed bonds with adjustments for bond-specific liquidity risk and real term premia. We estimate that the equilibrium real rate in Chile fell about 2 and a half percentage points in the 2003-2022 period and has remained low since then.

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  • Luis Ceballos & Jens H. E. Christensen & Damian Romero, 2024. "A Post-Pandemic New Normal for Interest Rates in Emerging Bond Markets? Evidence from Chile," Working Paper Series 2024-04, Federal Reserve Bank of San Francisco.
    • Handle: RePEc:fip:fedfwp:97796
    DOI: 10.24148/wp2024-04
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    1. Glenn D. Rudebusch, 2001. "Is The Fed Too Timid? Monetary Policy In An Uncertain World," The Review of Economics and Statistics, MIT Press, vol. 83(2), pages 203-217, May.
    2. Jens H. E. Christensen & Glenn D. Rudebusch, 2019. "A New Normal for Interest Rates? Evidence from Inflation-Indexed Debt," The Review of Economics and Statistics, MIT Press, vol. 101(5), pages 933-949, December.
    3. Andreasen, Martin M. & Christensen, Jens H.E. & Rudebusch, Glenn D., 2019. "Term Structure Analysis with Big Data: One-Step Estimation Using Bond Prices," Journal of Econometrics, Elsevier, vol. 212(1), pages 26-46.
    4. Gregory R. Duffee, 2002. "Term Premia and Interest Rate Forecasts in Affine Models," Journal of Finance, American Finance Association, vol. 57(1), pages 405-443, February.
    5. James D. Hamilton & Ethan S. Harris & Jan Hatzius & Kenneth D. West, 2016. "The Equilibrium Real Funds Rate: Past, Present, and Future," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 64(4), pages 660-707, November.
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    More about this item

    Keywords

    affine arbitrage-free term structure model; financial market frictions; monetary policy; rstar;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • 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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