TY - JOUR
T1 - Interest rate risk in an emerging economy
AU - Fernandez, Viviana
N1 - Funding Information:
Financial support from FONDECYT Grant No. 1010512, and from a grant from the Hewlett Foundation to CEA is greatly acknowledged.
PY - 2004/12
Y1 - 2004/12
N2 - The sharp decrease in inflation over the last decade - from 26% in 1990 to 4% in 2001 - led the Central Bank of Chile to set its monetary policy interest rate in nominal terms since August 2001. This paper analyzes the effect of nominalization on the behavior of nominal, inflation-linked, and real interest rates, and its subsequent effects on the financial market. We find that nominalization has made nominal interest rates less volatile, while the opposite holds for inflation-linked interest rates. The effect on real interest rates is less unambiguous, but nominalization appears to have increased the cost of borrowing.
AB - The sharp decrease in inflation over the last decade - from 26% in 1990 to 4% in 2001 - led the Central Bank of Chile to set its monetary policy interest rate in nominal terms since August 2001. This paper analyzes the effect of nominalization on the behavior of nominal, inflation-linked, and real interest rates, and its subsequent effects on the financial market. We find that nominalization has made nominal interest rates less volatile, while the opposite holds for inflation-linked interest rates. The effect on real interest rates is less unambiguous, but nominalization appears to have increased the cost of borrowing.
KW - ICSS algorithm
KW - Inflation risk
KW - Multivariate GARCH models
KW - Nominalization
UR - http://www.scopus.com/inward/record.url?scp=17144419593&partnerID=8YFLogxK
U2 - 10.1016/j.qref.2004.03.001
DO - 10.1016/j.qref.2004.03.001
M3 - Article
AN - SCOPUS:17144419593
SN - 1062-9769
VL - 44
SP - 678
EP - 709
JO - Quarterly Review of Economics and Finance
JF - Quarterly Review of Economics and Finance
IS - 5 SPEC.ISS.
ER -