Monetary Policy and Long-Term Interest Rates in Chile

Mauricio Larrain

Working Papers Central Bank of Chile from Central Bank of Chile

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.

Date: 2005-11
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Persistent link: https://EconPapers.repec.org/RePEc:chb:bcchwp:335

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