Description

The purpose of this paper is to identify the different components of the interest rate differential between Chile and abroad. In order to do so, a methodology for decomposing this differential is applied under two possible interest rate parity conditions: covered interest parity for US$/UF arbitrage operations and uncovered interest parity for US$/Pesos arbitrage operations. From the decomposition of the interest differential we are able to build up measures of country risk premium and exchange risk premium plus expected devaluation. Then we compare this measures with altemative measures of country risk and exchange risk plus expected devaluation. Toe comparison of the built and alternative series suggests that the country and exchange risk series under uncovered interest parity, rather than the series built under covered interest parity, show a behavior that is more coherent with that of the altemative measures in used in this study.