![]() ![]() There have been a number of complementary recent studies analyzing Latin American term structures such as De Pooter et al. Our analysis cannot prove by itself that inflation targeting has been the main driver of improved economic conditions. ![]() Regional correlations are strong, and although the US affects Latin American countries in predicable ways the dominant effect seems to be from domestic monetary policy. ![]() In several cases term premia correlates with the US, with comovement at particular events. The variation in term premia is remarkably similar across countries, indicating that a common factor seems to be at work. Interestingly, we find that long-run interest rate expectations remain stable in each country while movements in the term premia account for most of the observed variation in yields. We compare the results across countries where we have used no common information in the estimation. At the same time the Latin American countries we investigate have been pursuing monetary policy based on inflation targeting, with apparent success. In the last ten years, we have seen considerable turbulence in financial markets and commensurate actions by the US Federal Reserve have necessarily impacted upon Latin America. The affine model enables us to calculate implied term premia along the curve and even interest rate expectations, although this requires us to assume that the term premia is the only source of risk compensation. There is considerable interest in fitting such models. 2014), complementing the daily publication of the yield curve estimates documented in Gürkaynak et al. Indeed, the New York Federal Reserve Bank has recently begun publishing daily term premia estimates using this method (see Adrian et al. It is also computationally very inexpensive. ACM claim extremely good performance compared to more traditional alternatives. The ‘cost’ associated with this is first the necessary use of observable dynamic factors to drive the term structure, and second the use of synthetic bond-price contracts derived from parameterized yield curves. Their approach uses OLS to estimate models that previously required maximum likelihood. Several newly available technologies have been proposed to estimate these models, but a particularly attractive one is that of Adrian et al. As such they are extremely useful for the evaluation of the efficacy of monetary policy and the anchoring of interest rate expectations. Such models produce term premia estimates and, therefore, allow us to back out expectations of the future path of short-term interest rates. Recently it has become feasible to estimate affine models of the term structure in a routine manner. ![]()
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December 2022
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