Equilibrium real interest rates in Brazil: Convergence at last, but not quite

Authors

  • Marcelo Fonseca Center of Macroeconomic Studies Macro Brasil FGV-EESP
  • Marcelo Kfoury Muinhos Sao Paulo School of Economics - FGV
  • Evandro Schulz Bradesco

DOI:

https://doi.org/10.12660/rbfin.v20n1.2022.82751

Keywords:

Real interest rate, Laubach-Williams, Kalman filter

Abstract

Real interest rates in Brazil converged to zero in 2020, but increased again in 2021. This paper aims to measure the equilibrium interest rate to assess the stance of monetary policy. We calculate this latent variable using different methodologies, including a version of Laubach and Williams (2003) with fiscal and credit variables. Based on this approach, the long-run equilibrium rate is in the range of 2-4%, depending on the output gap and risk scenario. Our sensitivity analysis shows that results change slightly in different scenarios of Brazil risk premium and US interest rate. Since 2019, the effective real rate is significantly below the neutral rate and slightly below the Taylor rate, indicating an expansionary monetary policy, but since 2021 is back in a contractionary mode.

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Published

04/09/2022 — Updated on 05/07/2022