Equilibrium interest rates under inflation targeting: evidence from Brazil

Abstract

The real equilibrium interest rate (r*) is a fundamental concept for monetary policy in inflation targeting economies, since it is the real interest rate consistent with constant inflation, absent any shocks. This study addresses empirical challenges faced by one of the main methods to estimate equilibrium rates, based on the work of Laubach and Williams (2003). A monetary policy rule that implies an autoregressive path for interest rate cycles is incorporated to their model. This can greatly reduce uncertainty associated to the estimation of r ∗ and make data more informative on its path. This approach is then used to document the path of the equilibrium rate in Brazil since the adoption of the inflation target. There is evidence of a steep fall in the last 20 years, with value in the end of 2019 close to 3%. We also find that the reaction function of monetary policy has changed during this period, without impairing much the Central Bank’s credibility.

A taxa de juros real de equil´ıbrio ´e um conceito fundamental para a pol´ıtica monet´aria em economias com regime de metas de infla¸c˜ao, uma vez que define a taxa de juros real consistente com a infla¸c˜ao constante, na ausˆencia de choques. Para estudar o caso brasileiro, incorporamos ao modelo de Laubach e Williams (2003) uma regra de pol´ıtica monet´aria que implica um movimento autoregressivo para os ciclos de taxa de juros. Com isso, conseguimos reduzir a incerteza associada `a estimativa do juro de equil´ıbrio e reduzimos a dependˆencia do resultado `as priors impostas. Documentamos uma queda acentuada da taxa de juros real de equil´ıbrio nos ´ultimos 20 anos, com valor no final de 2019 pr´oximo a 3%. Al´em disso, evidenciamos de que a fun¸c˜ao de rea¸c˜ao da pol´ıtica monet´aria mudou durante esse per´ıodo, apesar de ter pouco afetado a credibilidade do Banco Central.