Inflation Compensation and Its Components in Chile

Abstract

This document studies the determinants of the components of inflation compensation, defined as the difference that exists between nominal and indexed interest rates. This analysis permits to evaluate how much they impact the portfolio choices of economic agents and, therefore, in interest rates observed in the market. For this, the determinants are broken down into components, building time series nonexistent until now. Subsequently models of behavior for inflation expectations are estimated, together with risk premiums for inflation, indexing and liquidity, for instruments of different maturities and in two dimensions. The empirical results confirm the hypothesis presented on the importance of incorporating not only expectations of inflation to explain inflation compensation in Chile, but also the existing risks in the market deriving finally to a more extensive Fisher relation than in their beginnings.