Working Paper

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

Abstract: Before the COVID-19 pandemic, researchers intensely debated the extent of the decline in the steady-state short-term real interest rateā€”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. 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.

Keywords: affine arbitrage-free term structure model; financial market frictions; monetary policy; rstar;

JEL Classification: C32; E43; E52; G12;

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Bibliographic Information

Provider: Federal Reserve Bank of San Francisco

Part of Series: Working Paper Series

Publication Date: 2024-02-21

Number: 2024-04

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