Long-Term Rates and the Term Premium: Evidence from Chile

16 Pages Posted: 24 Nov 2015

See all articles by Sebastián Claro

Sebastián Claro

Pontificia Universidad Catolica de Chile; Central Bank of Chile

Carola Moreno

Central Bank of Chile

Date Written: November 2015

Abstract

Chile is no exception to the high co-movement of sovereign long-term rates observed between EMEs and the United States. In particular, we show that the high co-movement is mainly driven by synchronisation of the term premium. The aggressive monetary policy in developed economies since the financial crisis, and the changing pattern in the profile of investors holding bonds issued abroad, have not only compressed term premia but have also increased their volatility. In this paper, we document these patterns for Chile, showing that in the last few years a larger share of Chilean bonds are being held by investors who are outside the oversight of the US Securities and Exchange Commission, such investors arguably being those who might adjust their portfolios abruptly. This poses a challenge regarding the impact on longer-term rates of monetary policy normalisation in the United States, and the capacity of Chile’s monetary policy to stabilise long-term rates in response to large swings in term premia.

Full publication: What Do New Forms of Finance Mean for EM Central Banks?

Keywords: term structure of interest rates, monetary policy, international finance

JEL Classification: E43, E52, F30

Suggested Citation

Claro, Sebastian and Moreno, Carola, Long-Term Rates and the Term Premium: Evidence from Chile (November 2015). BIS Paper No. 83f, Available at SSRN: https://ssrn.com/abstract=2692254

Sebastian Claro (Contact Author)

Pontificia Universidad Catolica de Chile ( email )

Casilla 76
Correo 17
Santiago
Chile

Central Bank of Chile ( email )

Publicaciones
Huerfanos 1185
Santiago
Chile

Carola Moreno

Central Bank of Chile ( email )

Publicaciones
Huerfanos 1185
Santiago
Chile

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