Abstract
We provide market-based estimates of the natural real rate, that is, the steady-state short-term real interest rate, for Brazil, Chile, and Mexico. Our approach uses a dynamic term structure finance model estimated directly on the prices of individual inflation- indexed bonds with adjustments for real term and bond-specific liquidity premia. First, we find that inflation-indexed bond liquidity premia in all three countries are sizable with significant variation. Second, we find large differences in their estimated equilibrium real rates with Brazil’s being large and volatile, Mexico’s stable, but elevated, while Chile’s is low and has fallen persistently.
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