Estimating Chile’s NominalIinterest Rate Structure: An Application of the Dynamic Nelson-Siegel Model

Rodrigo Alfaro (), Juan Becerra and Andres Sagner ()

Journal Economía Chilena (The Chilean Economy), 2011, vol. 14, issue 3, 57-74

Abstract: We propose a discrete, dynamic version of the Nelson-Siegel yield curve model, taking as valid the Log Expectations Hypothesis, plus an explicit modeling of the model’s factor dynamics. Within this framework, we propose two ways to identify the model parameters: ARIMA and cointegration. With the latter, the model is estimated for the Chilean economy between July 2004 and June 2011, using nominal interest rates on bonds issued by the Central Bank of Chile. Finally, steady-state factors are computed for the yield curve (slope and curvature), linking them to output and price indicators through a reduced-form macrofinancial model. Significant effects are found between real and financial variables; in particular, the slope of the yield curve affects the output measures with a lag of three to six months. On the other hand, the curvature has medium-term effects on inflation, which seems to be related to the speed of adjustment of the shorter-term interest rate to its steady-state value.

Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:chb:bcchec:v:14:y:2011:i:3:p:57-74

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