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Forecast of Short Run Nominal Interest Rates in Chile: Complex vs. Naive Models

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  • Franco Parisi

Abstract

This paper explores the explanatory and predictive capability of one-factor theoretical interest rate modeis and a naive AR(1) model for the short-term interest rate in Chile. The theoretical models outperform the naive alternative: the CKLS model correctly predicts 70% of the time the direction of change in interest rates while the naive model does it only 50% of the time. Moreover, the forecast error for the interest rate is in the range of 0.21% to 0.43% in the theoretical models versus a range of 0.67% to 0.76% in the case of the AR(1) models. Interest rates also display mean reversion.

Suggested Citation

  • Franco Parisi, 1999. "Forecast of Short Run Nominal Interest Rates in Chile: Complex vs. Naive Models," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 2(3), pages 027-040, December.
    • Handle: RePEc:chb:bcchec:v:2:y:1999:i:3:p:027-040
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