FISHERIAN TRANSMISSION AND EFFICIENT ARBITRAGE UNDER PARTIAL FINANCIAL INDEXATION - THE CASE OF CHILE

Partial financial indexation in Chile has produced a system in which m ost bank deposits are 30-day nonindexed deposits or 90-day indexed dep osits. This paper uses data on the interest rates of these financial a ssets to test the joint hypothesis of rational expectations, efficient arbitrage, and a time-invariant liquidity premium. The data are also used to test whether the indexed/nonindexed interest spread is an accu rate predictor of future changes in inflation, as the Fisher effect di ctates. The significant implications of this empirical analysis for mo netary policy are discussed.