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What Drives Long Term Real Interest Rates in Brazil?

Author

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  • Adonias Evaristo da Costa Filho

    (ASP student - Kiel Institute for the World Economy)

Abstract

This paper investigates the drivers of long term real interest rates in Brazil. It is shown that long term yield on inflation linked bonds are driven by yields on 10 year interest rates of United States (US) government bonds and 10 year risk premium, as measured by the Credit Default Swap (CDS). Long term interest rates in Brazil were on a downward trend, following US real rates and stable risk premium, until the taper tantrum in the first half of 2013. From then onwards, real interest rates rose due to the increase in US real rates in anticipation of the beginning of monetary policy normalization and, more recently, due to a sharp increase in Brazilian risk premium. Policy interest rates do not significantly affect long term real interest rates.

Suggested Citation

  • Adonias Evaristo da Costa Filho, 2017. "What Drives Long Term Real Interest Rates in Brazil?," Brazilian Business Review, Fucape Business School, vol. 14(6), pages 624-635, November.
  • Handle: RePEc:bbz:fcpbbr:v:14:y:2017:i:6:p624-635
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    References listed on IDEAS

    as
    1. 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 33rd Brazilian Economics Meeting] 028, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    2. Joshua Aizenman & Mahir Binici & Michael M. Hutchison, 2016. "The Transmission of Federal Reserve Tapering News to Emerging Financial Markets," International Journal of Central Banking, International Journal of Central Banking, vol. 12(2), pages 317-356, June.
    3. Alex Segura-Ubiergo, 2012. "The Puzzle of Brazil's High Interest Rates," IMF Working Papers 12/62, International Monetary Fund.
    4. Portugal, Marcelo Savino & Barcellos, Paulo, 2009. "The Natural Rate of Interested in Brazil Between 1999 and 2005," Revista Brasileira de Economia - RBE, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 63(2), June.
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