Why are real interest rates in Brazil so high?

In 2002 the ex ante real interest rate in Brazil seemed to be over fifteen percent (pdf).  The linked analysis blames the budget deficit, risky swaps premia, and other factors.  Sure enough, the Brazilian economy has done very well since 2002 and real rates are “down” to about five percent, which is still very high.  They are not so high in Chile, Mexico, or Turkey, arguably the economic peer countries of Brazil.  A different earlier analysis cites how the uncertainty of economic policy connects with international liquidity provision to generate high real rates.  Here is a paper on jurisdictional uncertainty and high rates in Brazil.  The history of high real interest rates is longer yet, covering many of the last thirty-five years.

I found the first and fourth links to offer overly complicated explanations, and those models did not offer stunningly correct predictions for the subsequent period.  The “crude” analysis is that the Brazilian savings rate is very low for a developing country (about fifteen percent of income), the size of the Brazilian government is very high for a developing country (about forty percent of gdp), and the productivity of real investment here is high because of lots of low-hanging fruit (literally and figuratively, not just tasty bananas but add on soya and off-shore drilling and other resources).  Yet bad mercantilist policies, bad labor law, and the pressure of government spending on savings all mean that the return on capital does not fall so much at the margin.  There remain many underexploited opportunities, and thus one can be a Brazil optimist while seeing only a tolerably good policy environment, but tolerably good it seems to be.

Sometimes, when risk and liquidity factors intervene, the real rate of interest is especially high, but it is quite high to begin with.

Sometimes it is argued that when the “U.S. monetary expansion ends” (please don’t debate that issue in the comments on this post), Brazilian real interest rates will rise once again to extreme levels.

High real interest rates keep Brazil relatively free of excess private sector debt.

It is odd how little economists understand about real interest rates.


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