IMF Working Papers

The Puzzle of Brazil's High Interest Rates

By Alex Segura-Ubiergo

February 1, 2012

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Alex Segura-Ubiergo. The Puzzle of Brazil's High Interest Rates, (USA: International Monetary Fund, 2012) accessed November 21, 2024
Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Domestic savings, Emerging and frontier financial markets, Financial markets, Financial services, Inflation, Inflation targeting, Monetary policy, National accounts, Prices, Real interest rates

Keywords: Brazil, Brazil's real interest rates, Domestic savings, East Asia, Emerging and frontier financial markets, Emerging market, Equilibrium real interest rate, Fiscal policy, Inflation, Inflation targeting, Inflation targeting country, Inflation volatility, Inflation-targeting regime, Interest rates, Real interest rate, Real interest rates, Real interest rates in Brazil, South Asia, WP

Publication Details

  • Pages:

    20

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2012/062

  • Stock No:

    WPIEA2012062

  • ISBN:

    9781463938390

  • ISSN:

    1018-5941

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