IDEAS home Printed from https://ideas.repec.org/p/rio/texdis/441.html
   My bibliography  Save this paper

Very high interest rates and the cousin risks: Brazil during the Real Plan

Author

Listed:

Abstract

We review the arguments in the finance and open macroeconomics literature relevant for the Central Bank to set the level of the interest rate in an open economy. The two relevant risks are the currency and country risks. The country risk (Brazil Risk) is measured with different financials instruments and the (unobservable) currency risk is estimated via the Kalman Filter. We show that besides the currency risk, which is also relevant in developed economies the country risk is of utmost importance to determine the domestic interest rates. Both risks share a few common causes, which is why we call them the cousin risks. Thus, when and if those common causes are confronted, the fall of domestic interest rates may be substantial, because both currency and Brazil risks will fall simultaneously. Preliminary results identify some components of the Brazil risk, e.g., the fiscal deficits, and the domestic and international financial markets conditions. The convertibility risk, defined as risk associated with possibility of not being able to convert BRLs into foreign currency, showed up as an important cause of the Brazil risk during the international financial crises periods, but is no longer relevant. Nowadays, Brazil risk decreased significantly, but the same did not happen with the currency risk. Therefore, it seems that the main factor precluding the fall in domestic interest rates may be associated with the uncertainty of the future behavior of the balance payments, especially the trade account. In view of this hypothesis, we might speculate that assuring vigorous export growth, without resorting to devaluation, is fundamental to achieve lower real interest rates, compatible with sustained economic growth.

Suggested Citation

  • Márcio Gomes Pinto Garcia & Tatiana Didier, 2000. "Very high interest rates and the cousin risks: Brazil during the Real Plan," Textos para discussão 441, Department of Economics PUC-Rio (Brazil).
  • Handle: RePEc:rio:texdis:441
    as

    Download full text from publisher

    File URL: http://www.econ.puc-rio.br/pdf/td441.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, January.
    2. Jeffrey A. Frankel, 1991. "Quantifying International Capital Mobility in the 1980s," NBER Chapters,in: National Saving and Economic Performance, pages 227-270 National Bureau of Economic Research, Inc.
    3. Fama, Eugene F., 1984. "Forward and spot exchange rates," Journal of Monetary Economics, Elsevier, vol. 14(3), pages 319-338, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Brisne J. V. Céspedes & Elcyon C. R. Lima & Alexis Maka & Mário J. C. Mendonça, 2005. "Measuring Monetary Policy Stance in Brazil," Discussion Papers 1128, Instituto de Pesquisa Econômica Aplicada - IPEA.
    2. Marcio Garcia & Roberto Rigobon, 2004. "A Risk Management Approach to Emerging Market's Sovereign Debt Sustainability with an Application to Brazilian Data," NBER Working Papers 10336, National Bureau of Economic Research, Inc.
    3. Schmukler, Sergio L. & Serven, Luis, 2002. "Pricing currency risk under currency boards," Journal of Development Economics, Elsevier, vol. 69(2), pages 367-391, December.

    More about this item

    JEL classification:

    • C29 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Other
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:rio:texdis:441. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (). General contact details of provider: http://edirc.repec.org/data/dpucrbr.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.