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Monetary Policy and Long-Term Interest Rates in Chile

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  • Mauricio Larraín

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.

Suggested Citation

  • Mauricio Larraín, 2005. "Monetary Policy and Long-Term Interest Rates in Chile," Working Papers Central Bank of Chile 335, Central Bank of Chile.
    • Handle: RePEc:chb:bcchwp:335
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    File URL: https://www.bcentral.cl/documents/33528/133326/DTBC_335.pdf
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    References listed on IDEAS

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    1. Kuttner, Kenneth N., 2001. "Monetary policy surprises and interest rates: Evidence from the Fed funds futures market," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 523-544, June.
    2. Refet S. Gürkaynak & Andrew T. Levin & Andrew N. Marder & Eric T. Swanson, 2007. "Inflation Targeting and the Anchoring of Inflation Expectations in the Western Hemisphere," Central Banking, Analysis, and Economic Policies Book Series, in: Frederic S. Miskin & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.),Monetary Policy under Inflation Targeting, edition 1, volume 11, chapter 11, pages 415-465, Central Bank of Chile.
    3. Refet S Gürkaynak & Brian Sack & Eric Swanson, 2005. "Do Actions Speak Louder Than Words? The Response of Asset Prices to Monetary Policy Actions and Statements," International Journal of Central Banking, International Journal of Central Banking, vol. 1(1), May.
    4. Cook, Timothy & Hahn, Thomas, 1989. "The effect of changes in the federal funds rate target on market interest rates in the 1970s," Journal of Monetary Economics, Elsevier, vol. 24(3), pages 331-351, November.
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    Cited by:

    1. Ramon Moreno, 2008. "Monetary policy transmission and the long-term interest rate in emerging markets," BIS Papers chapters, in: Bank for International Settlements (ed.), Transmission mechanisms for monetary policy in emerging market economies, volume 35, pages 61-79, Bank for International Settlements.
    2. Monique Reid, 2009. "The Sensitivity Of South African Inflation Expectations To Surprises," South African Journal of Economics, Economic Society of South Africa, vol. 77(3), pages 414-429, September.
    3. Monique Reid & Pierre Siklos, 2020. "Building Credibility and Influencing Expectations The Evolution of Central Bank Communication," Working Papers 10144, South African Reserve Bank.

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