The phenomenon of high and persistent short-term real interest rates in Brazil has stimulated an extensive literature attempting to explain its causes. Among the various contributions on the topic, one that has received considerable attention is the article by Arida, Bacha, and Lara-Resende (2004) (henceforth, ABL), which argues that risks associated with the jurisdiction and currency inconvertibility are relevant determinants of the level of short-term real interest rates. In the present paper, we formulate a methodology based on ABL's definition of jurisdiction uncertainty, use a set of institutional variables that proxy the degree of jurisdictional uncertainty, build an index of currency inconvertibility based on capital controls and use them to test ABL's conjecture and variants of it. The results are by and large unfavorable not only to ABL's conjecture, but also to variants of their argument. The results further indicate that traditional monetary and fiscal factors are far more relevant to explain the level of short-term real interest rates than the binomial jurisdictional uncertainty/ currency inconvertibility is.
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Length: Date of creation: 2005 Date of revision: Handle: RePEc:anp:en2005:028
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Find related papers by JEL classification: E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General K41 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - Litigation Process K40 - Law and Economics - - Legal Procedure, the Legal System, and Illegal Behavior - - - General
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Rafael La Porta & Florencio Lopez-de-Silanes & Andrei Shleifer & Robert W. Vishny, 1998.
"Law and Finance,"
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Rafael La Porta & Florencio Lopez-de-Silane & Andrei Shleifer & Robert W. Vishny, 1996.
"Law and Finance,"
NBER Working Papers
5661, National Bureau of Economic Research, Inc.
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Daron Acemoglu & Simon Johnson, 2003.
"Unbundling Institutions,"
NBER Working Papers
9934, National Bureau of Economic Research, Inc.
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