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The Puzzle of Brazil's High Interest Rates

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  • Alex Segura-Ubiergo

Abstract

This 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.

Suggested Citation

  • Alex Segura-Ubiergo, 2012. "The Puzzle of Brazil's High Interest Rates," IMF Working Papers 12/62, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:12/62
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    References listed on IDEAS

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    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. Olivier Blanchard, 2004. "Fiscal Dominance and Inflation Targeting: Lessons from Brazil," NBER Working Papers 10389, National Bureau of Economic Research, Inc.
    3. Carlo Ambrogio Favero & Francesco Giavazzi, "undated". "Why are Brazil´s Interest Rates so High?," Working Papers 224, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    4. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-329, June.
    5. Hausmann, Ricardo, 2008. "Is Search of the Chains That Hold Brazil Back," Working Paper Series rwp08-061, Harvard University, John F. Kennedy School of Government.
    6. Edmar L. Bacha & Márcio Holland & Fernando M. Gonçalves, 2007. "Is Brazil Different? Risk, Dollarization, And Interest In Emerging Markets," Anais do XXXV Encontro Nacional de Economia [Proceedings of the 35th Brazilian Economics Meeting] 028, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    7. Maurice Obstfeld & Kenneth Rogoff, 2001. "The Six Major Puzzles in International Macroeconomics: Is There a Common Cause?," NBER Chapters,in: NBER Macroeconomics Annual 2000, Volume 15, pages 339-412 National Bureau of Economic Research, Inc.
    8. Nelson H. Barbosa-Filho, 2009. "Inflation Targeting in Brazil: 1999–2006," Chapters,in: Beyond Inflation Targeting, chapter 7 Edward Elgar Publishing.
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    Citations

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    Cited by:

    1. Ogundairo, Brian Bolarinwa & Rodrigues, Mauro, 2016. "Previdência e Taxa de Juros no Brasil," Revista Brasileira de Economia - RBE, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 70(3), September.
    2. repec:eee:ecmode:v:64:y:2017:i:c:p:117-127 is not listed on IDEAS
    3. Joonkyu Park, 2012. "Brazil’s Capital Market; Current Status and Issues for Further Development," IMF Working Papers 12/224, International Monetary Fund.
    4. Balliester Reis, Thereza, 2016. "Why are policy real interest rates so high in Brazil? An analysis of the determinants of the Central Bank of Brazil's real interest rate," IPE Working Papers 80/2016, Berlin School of Economics and Law, Institute for International Political Economy (IPE).
    5. repec:eee:jimfin:v:74:y:2017:i:c:p:31-52 is not listed on IDEAS
    6. Nicolas E Magud & Evridiki Tsounta, 2012. "To Cut or Not to Cut? That is the (Central Bank’s) Question In Search of the Neutral Interest Rate in Latin America," IMF Working Papers 12/243, International Monetary Fund.
    7. André Roncaglia de Carvalho, 2013. "Inflation, structural change and conflict in post-disinflation Brazil: a structuralist appraisal," Working Papers, Department of Economics 2013_25, University of São Paulo (FEA-USP).
    8. André Roncaglia de Carvalho, 2014. "Structural change, de-industrialization and inflation inertia in Brazil," Working Papers, Department of Economics 2014_29, University of São Paulo (FEA-USP).
    9. Marialuz Moreno Badia & Alex Segura-Ubiergo, 2014. "Real Exchange Rate Appreciation in Emerging Markets; Can Fiscal Policy Help?," IMF Working Papers 14/1, International Monetary Fund.
    10. Monica de Bolle, 2015. "Do Public Development Banks Hurt Growth? Evidence from Brazil," Policy Briefs PB15-16, Peterson Institute for International Economics.
    11. Rene Coppe Pimentel & Taufiq Choudhry, 2014. "Stock Returns Under High Inflation and Interest Rates: Evidence from the Brazilian Market," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 50(1), pages 71-92, January.
    12. repec:bla:devpol:v:35:y:2017:i:5:p:675-702 is not listed on IDEAS

    More about this item

    Keywords

    Domestic savings; Emerging markets; Brazil; Fiscal policy; Inflation targeting; Monetary policy; Interest rates; inflation; real interest rates; real interest rate;

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