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

Luis Ceballos, Jens Christensen and Damian Romero

No 2024-04, Working Paper Series from Federal Reserve Bank of San Francisco

Abstract: Before the COVID-19 pandemic, researchers intensely debated the extent of the decline in 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. Beyond documenting the existence of large and time-varying liquidity risk premia in the bond prices, 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 with model projections only suggesting a gradual reversal in coming years. Instead, recent increases in real interest rates in Chile are driven by spikes in the liquidity and term premia of inflation-indexed bond prices.

Keywords: affine arbitrage-free term structure model; financial market frictions; monetary policy; rstar (search for similar items in EconPapers)
JEL-codes: C32 E43 E52 G12 (search for similar items in EconPapers)
Pages: 53
Date: 2024-08-12
New Economics Papers: this item is included in nep-ban, nep-cba and nep-mon
Note: Original publication date: 2024-02-21.
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Journal Article: A post-pandemic new normal for interest rates in emerging bond markets? Evidence from Chile (2025)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedfwp:97796

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DOI: 10.24148/wp2024-04

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