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The Puzzle of Brazil's High Interest Rates

  • Alex Segura-Ubiergo

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.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 12/62.

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Length: 20
Date of creation: 01 Feb 2012
Date of revision:
Handle: RePEc:imf:imfwpa:12/62
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  1. Olivier Blanchard, 2004. "Fiscal Dominance and Inflation Targeting: Lessons from Brazil," NBER Working Papers 10389, National Bureau of Economic Research, Inc.
  2. repec:fgv:epgrbe:v:61:n:1:a:3 is not listed on IDEAS
  3. Nelson Barbosa-Filho, 2008. "Inflation targeting in Brazil: 1999-2006," International Review of Applied Economics, Taylor & Francis Journals, vol. 22(2), pages 187-200.
  4. Maurice Obstfeld & Kenneth Rogoff & Ben Bernanke & Kenneth Rogoff, . "The Six Major Puzzles in International Macroeconomics: Is there a Common Cause?," Working Paper 32326, Harvard University OpenScholar.
  5. Martin Feldstein & Charles Horioka, 1979. "Domestic Savings and International Capital Flows," NBER Working Papers 0310, National Bureau of Economic Research, Inc.
  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 Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
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