Cover IMF Working Papers
Efficient Arbitrage Under Financial Indexation: The Case of Chile
Author: Mr. Enrique G. Mendoza
Series:
IMF Working Papers
Volume/Issue:
Volume 1991: Issue 049
Language:
English
Publication Date:
01 May 1991
DOI:
https://doi.org/10.5089/9781451971668.001
ISBN:
9781451971668
ISSN:
1018-5941
Pages:
36
Keywords:
WP; financial system; inflation rate; indexation mechanism; inflation risk; inflation-risk component; UF premium; indexation system; market efficiency; Inflation; Real interest rates; Rational expectations
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IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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Legal restrictions governing financial transactions in Chile have produced a system in which most financial assets are either 30-day non-indexed assets or 90-day indexed assets. This paper analyzes data on the rates of return of these assets to determine the extent to which efficient arbitrage takes place under conditions of partial financial indexation. The data cannot reject the joint hypothesis that participants in financial markets formulate their expectations rationally and that these markets operate efficiently. The data also shows that the indexed/non-indexed interest spread is an accurate predictor of future changes in inflation. The significant implications of these findings for the conduct of monetary policy are also discussed in some detail.
Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund