Inflation Targeting and Term Premia Estimates for Latin America
Latin American Economic Review (2015), 24(3)
21 Pages Posted: 15 Aug 2015
Date Written: June 2, 2014
Inflation targeting has been widely adopted in Latin America. In this paper, we show evidence consistent with major beneficial effects from so doing, with falling term premia and anchored policy rate expectations. To do this we construct term premia estimates using the method suggested by Adrian et al. (2013) for selected inflation targeting Latin American economies. They use synthetic prices constructed from estimated yield curves to derive holding-period excess returns and condition on the principal components of the yields. This approach is extremely easy to implement and fast to calculate. We detect a small drop in interest rate expectations since the global financial crisis but longer term rates seem remarkably well anchored. There is also relatively low correlation between our estimated Latin American and US term premia.
Keywords: Inflation targeting, term premia, affine term structure model
JEL Classification: E43, E58, G12, G17
Suggested Citation: Suggested Citation