The Puzzle of Brazil's High Interest Rates
AbstractThis paper highlights that real interest rates in Brazil have declined substantially over time, but are still well above the average of emerging market inflation targeting regimes. The adoption of an inflation-targeting regime and better economic fundamentals (reduction in inflation volatility and improvements in the fiscal and external positions) has helped Brazil sustain significantly lower real interest rates than in the past. Going forward, the paper shows that Brazil can converge towards lower equilibrium real interest rates if domestic savings increase to the level of other emerging market countries. The effect is particularly pronounced if the increase in domestic savings is achieved through higher levels of public savings. Still, econometric results suggest that, controlling for everything else in the model, real interest rates in Brazil are about two full percentage points higher than in other countries in the sample, suggesting that there are still Brazil-specific factors that have not been captured by the empirical analysis. Some of these factors may include credit market segmentation and inflation inertia generated by still pervasive indexation practices.
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Bibliographic InfoPaper provided by International Monetary Fund in its series IMF Working Papers with number 12/62.
Date of creation: 01 Feb 2012
Date of revision:
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2012-03-21 (All new papers)
- NEP-MAC-2012-03-21 (Macroeconomics)
- NEP-MON-2012-03-21 (Monetary Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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- Fernando M Gonçalves & Marcio Holland & Andrei Spacov, 2007.
"Can Jurisdictional Uncertainty and Capital Controls Explain the High Level of Real Interest Rates in Brazil? Evidence from Panel Data,"
Revista Brasileira de Economia,
FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 61(1), pages 49-76, August.
- Fernando M. Gonçalves & Márcio Holland & Andrei D. Spacov, 2005. "Can Jurisdictional Uncertainty And Capital Controls Explain The High Level Of Real Interest Rates In Brazil? Evidence From Panel Data," Anais do XXXIII Encontro Nacional de Economia [Proceedings of the 33th Brazilian Economics Meeting] 028, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
- Martin Feldstein & Charles Horioka, 1979.
"Domestic Savings and International Capital Flows,"
NBER Working Papers
0310, National Bureau of Economic Research, Inc.
- Nelson Barbosa-Filho, 2008. "Inflation targeting in Brazil: 1999-2006," International Review of Applied Economics, Taylor & Francis Journals, vol. 22(2), pages 187-200.
- International Monetary Fund, 2012. "Brazilâ€™s Capital Market: Current Status and Issues for Further Development," IMF Working Papers 12/224, International Monetary Fund.
- Nicolas E. Magud & Evridiki Tsounta, 2012. "To Cut or Not to Cut? That is the (Central Bankâ€™s) Question In Search of the Neutral Interest Rate in Latin America," IMF Working Papers 12/243, International Monetary Fund.
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