Equilibrium interest rates in Brazil: a laubach and williams approach

Abstract

Real interest rates in Brazil are still high in any international comparison, even considered that they have declined significantly in the last few years. The main purpose of this paper is not only to update but also extend the Laubach and Williams (2003) using fiscal and credit variables. We also present a new methodology to calculate the output gap. Our long run equilibrium rate is slightly above 3% aligned with Laubach and Williams (2003) and supposing long term inflation expectation in US is 2%, real rates there are half what we found for Brazil. Our sensitivity analysis have shown that our results changed slightly in different scenarios regarding Brazil risk premium but deeply to potential GDP growth. Considering the alternative scenario for output gap, real rate values are much lower, because in this case output gap is much wider.