Real business cycle theory in Brazil

How much gdp shrunk last year: 3.8%

How much it is forecast to shrink this year:  about the same.

The current rate of unemployment: 8.2%, it had been 4.3% only three years ago.

The current inflation rate: over ten percent.

All critics of real business cycle theory should commit these numbers to heart; this is more than 200 million people we are talking about.  We’re at the point where impeachment of the President is the “good news scenario.”


I liked Dani Rodriks comment in the Washington Post: "Economists have this outdated notion that economics advances through a progression of ever-better theories, with empirical testing serving to reject wrong models and confirm valid ones. In reality, we are really bad at formulating general models as social reality is malleable and contextual."

So business cycles for sure, but is it necessary to argue that this one is purely "real?"

Darn, I wanted the next line too: "Our theories — such as the theory of value or the theory of comparative advantage — are just scaffoldings, which need a lot of context-specific detail to become usable."

social reality is malleable and contextual.

Is that a polite way of saying Brazilians are not Northern Protestants and in the end it is hard to persuade them to be otherwise?

The Financial crisis is largely breaking down along civilizational lines in Europe. The Latin south continues to be Latin. The Protestant Germanic north continues to be German. Why would anyone think the Brazilians are going to be anything but Brazil?

Rodrik is talking his book, literally, which I just finished and found a bit too simplistic and patronizing to economists but overall an OK read.

OK...let's put on our RBC hats and look at this situation.

There was some random, but persistent shock that negatively affected productivity. As a result, many people decided that work was no longer worth their time (due to the lower productivity), and opted to enjoy leisure time instead, living off some of the saving they had accumulated in previous more productive times. If we assume this random negative productivity shock follows an AR(1) process, it'll eventually dissipate. At that point productivity will increase, and those who are currently enjoying leisure time will opt back into working to take advantage of the higher productivity. Both Fiscal and Monetary policy are useless, if not outright counter-productive. Best just to wait out this negative stochastic shock for eventually this tempestuous season will pass and the oceans will be flat again. Once that happens, it'll be "time to build."

Is that final comment a statement about the fact that RBC doesn't offer much in the way of guidance, other than lower taxes and deregulate industries, (and in essence tells us not to worry too much), and if we truly care about millions of people, we may want to look at non-RBC ideas for suggestions on how to help people.

Maybe, RBC is not the right term as Brazil may not even be going through a "cycle" as much as it could be suffering a "permanent" decrease in AS, permanent in scare quotes because it could eventually be fixed by the right supply-side policies. The point is that Brazil is facing a supply-side problem, not a demand-side problem that could be fixed with monetary or fiscal stimulus. We know it's an AS problem because growth and employment are falling as inflation is increasing.

Supply-side solutions could involve lower taxes and deregulation --- I don't know Brazil well enough to know whether or not those are the right supply-side solutions --- and addressing the supply side is not simply "not worrying too much". If there has been a leftward shift of the LRAS curve, then demand-side stimulus would in fact be counterproductive, just increasing inflation without increasing long-term output.

I think the point is that both AS and AD matter, and AD matters mainly only after one gets AS right, especially LRAS.

What does this have to do with RBC?

Is Tyler saying there is no way this can be driven by tech shocks? (I agree but would be nice to have less cryptic statements from him sometimes...)

+1 --I too was going to say the same thing. Like a grandmaster who makes a weak move, but his opponent fails to capitalize on it because he's so in awe of the grandmaster and thinks the move is somehow the work of genius (seen this many times)...

If this will prompt Brazil to renege on the Olympics (and will let the IOC foot the bill) at least something good will have come out of it.

Perish the thought! Most related public works are almost finished (and the unfinished public works designed for the World Cup are proceeding steadily) and paid for. We paid for the mausoleum, the least we deserve is a proper funeral.
It is about sunk costs, the money was already spent, the workers were already hired, building material was already bought, bribes were already payed. Unless Superman reverts Earth's rotation again, the money is gone, it won't come back, this ship has sailed to Switzerland (which is kinda strange, because it is a landlocked country). We need Olympic tourism to make up for it. So the question is, how many tourists will come?

"We paid for the mausoleum, the least we deserve is a proper funeral."

Nice! Is that a proverb or a quote?

If I am not wrong, it was a Soviet citizen who, during Khruschev's Thaw, was asked what was the difference between Stalin's indiscriminate terror making the victims vanish and getting rid of the bodies secretly and Khruschev's more law-based repression and he replied: "Now, at least when they kill use, we will have coffins".
Well, we already paid for the manusoleu, we can't just be thrown into a mass grave.

Nailed it.

I'm still thinking about going to Rio nest August. The city is still splendid and the Games have some interesting prospects. Swimming looks promising and see how the young guns can exploit Bolt's last Olympics can justify my trip. Plus, the basketball tournament can be the closing chapter of "The Steph Curry Show - The Golden Season".

I'm yet to decide, but I'm really tempted.

So what is going on? Export markets are soft, commodity prices are down, cost structures are adjusting down from the peaks built up during the boom, left leaning governments or practice are making things worse, coastal cities are seeing real estate price increases from fleeing Chinese money, all the while imported goods are up 20-50% due to currency exchange?

I know nothing about Brazil.

Other than real estate I think you nailed it.

I don't think you sufficiently emphasized the negative impact of left leaning policies, or the somewhat related state of lawlessness in Brazil or the also related epic corruption levels.

It is a country with tremendous natural resources which enabled it to rise, ever so slightly, from the muck during the resource book but it is now falling back down to its natural level.

The lack of a foreign money real estate boom tells me that the political system is profoundly unstable, and there is no safe assets.

Absolutely correct.

The reason I'm not tempted to buy real estate in that country is due the lack of rule of law. I am sure that this thought process is what is guiding many.

that the political system is profoundly unstable, and there is no safe assets.

The last military coup was in 1964; a cadet young enough to have participated would now be 68 years old. The country actually does not have much of a history with frankly despotic government or with unqualified military government. Since 1822, these were manifest from 1889-91, 1930-45, and 1964-73, with extra-legal regime changes occurring only in 1889, 1930, and 1964. The inflation rate as we speak is about 11%, not the triple or quadruple-digit rates which were prevalent 25 years ago.

You are looking for big events. I posit that the most important things are happening at the edges, and they are seldom reported or widely known. The results are often the only thing we see.

There are huge amounts of money coming out of China and we are seeing properties bought sight unseen for above listed price in Vancouver, only to be left empty. I would think that Brazil would see the same thing, but obviously not, Why so? The odds of still owning the property in 5 years as long as you pay the taxes is very high in Vancouver, the US and in most of Europe. Is that the case in Brazil? Maybe the impression is that it isn't.

You said the political system is 'profoundly unstable', which is tommyrot.

The lawlessness is baseline. How could it account for changes? Are you saying it makes hot money hotter?

The Index of Economic freedom says:

"Brazil’s limited experiment with market-oriented reforms has been uneven and even derailed in some areas. The state’s presence in such sectors as energy, financial services, and electricity remains extensive. The legacy of decades of central planning, state meddling in economic activity continues even where it has demonstrably failed, and the weak rule of law further undermines economic progress."

I thought you couldn't have high inflation and high unemployment.

Of course you can or at the very least recession and inflation (AKA stagflation, AKA 1970s). The point is, can a expansionary monetary policy be useful for fighting unemployment sometimes (often)? And fighting the inflation with responsible monetary policy probably will cause even more unemployment and a deeper at the short run (it did in the 60s and 90s), Yet it propbably has to be done.

Almost as if Brasil has nothing to do with the oil business -

Or the corruption accusations tend to involve Petrobras - 'Petrobras lost $2.1 billion to the largest corruption scheme in Brazilian history, the state oil giant said, releasing its first audited accounts of a scandal that has enveloped the company and badly wounded the government.

Petrobras, the largest company in the world's seventh-biggest economy, announced losses of 21.6 billion reals ($7.2 billion) for 2014.

By finally releasing its long-delayed results, the company is seeking to turn the page on five tumultuous months in which its chief executive and entire board were forced to resign and ratings agencies hit it with a string of downgrades.

Prosecutors accuse Petrobras executives of colluding with construction companies to massively inflate contracts and bribe politicians, including members of President Dilma Rousseff's Workers' Party (PT) and its allies.'

The really amusing thing is that Dilma Vana Rousseff, the person being impeached, is a Brazilian economist. according to her wiki bio.

The first three points are characteristics of a recession. Exactly what a RBC model can explain.

Regarding the fourth point, just because inflation is there does not mean that RBC models are wrong. Do we have a comparable model that credibly shows that price shocks are the causal factor behind recessions, or that inflation deepens a recession kicked off by other shocks? I don't think so.

Brazil, the textbook multicultural society

What if drugs were legal?

What if you could control your fixations?

Textbook lack of self-awareness, the kind I've come to expect here. Well done.

Brazilian here. This crisis is not related to multiculturalism. If we had the economic policy of the multicultural Singapore, we would be rich.

And Asians.

Good policies are a choice, just like the bad ones. I don't think "culture" and geography are the only source of bad politics.

What if we ignored relevant things?

How much violence in Brazil is essentially directly attributable to the illegality of the drug trade?

Let's pretend it's zero, and blame their genes and cultural diversity. That way we can pretend that we haven't supported one of the most patently retarded things in the history of the planet, setting an entire continent at low level civil war as a result.

There is a spectrum of phenotypes in Brazil. I think there have been immigrant streams, but it's not properly regarded as 'multi-cultural'. The oriental population is supposed to be 1% of the total. The Arab minority is drawn largely from Levantine Christians and is in the low single digits. Aboriginals are less than 1% of the total. Per Ethnologue, immigrant tongues are spoken by < 1% of the population.

Seems that in the 21st century multi-culturalism is coming to mean a separation of cultures, rather than the overlap and remixing I understood it to mean in the 20th.

Forgive the cultural appropriation in those Arabic numerals.

"Seems that in the 21st century multi-culturalism is coming to mean a separation of cultures, rather than the overlap and remixing I understood it to mean in the 20th."
There was no remixing and overlap, just assimilation. Most of the population is Catholic or Protestant, the official language is widely spoken and understood with few variations in an area bigger than Western Europe. Maybe you are talking about races (basically Blacks, there are not that much Asians, the Natives were destroyed/assimilated/ sidelined and Portuguese Whites were the conquerors/colonists), but it is too timid to speak clearly.

I wrote that as a Californian who is not only different from any old European culture, but any other American one as well.

(I am the same "anon" who observed that Cowboy culture is largely Vaquero culture.)

It may be true for California, but it is not true for Brazil. Unless you count a little more percussion instruments than any sane nation would want (due to African influence), the occasional Arab dish and American mass culture, there is nothing multicultural about Brazil There are regional differences (Northern cuisine strongly uses "exotic" fruits and fish), there are differences conditioned by economic realities-- people raised in favelas don't behave like people rased in gated communites for the same reason Appalachian Yokels don't behave like Harvard teachers or British Chavs don't behave like the Queen. Brazil is a multiethnic (and only two groups are statistically relevant: Whites and Blacks).

There are no mestizos??

"There are no mestizos??"
Of course, mostly children of Blacks and Whites, but:
1) Americans would consider most of them Black, the same way Obama is Black.
2) Culturally, they are not distinct from Blacks and Whites, not the way the Japanese, Arab and Pomerans immigrants (and some of their children, raised in islands of foreign culture- before the War, there were Japanese schools and newspaper in Brazil for instance) were. They were not assimilated, they were born in Brazilian culture.

@Thiago, I expecdt you are right about Brazil, but that anon was changing the subject a little and making a general point about the word "multiculturalism".

@anon I think the true believers introduced the word "mulitculuralism" were always more about supporting distinct cultural groups than "overlap and remixing". But since melting-pot ideas were (are?) very popular there was a useful ambiguity, so that every could agree to be in favour of multiculturalism in some sense of the word.

Brazil is in the middle of a political crisis and has a HUGE fiscal problem. The country needs structural reforms, especially involving indexed govt spending.

This is like calling out a stock with no alpha a saying, critics of EMT take heed! This post only makes sense if you believe in a form of RBC so weak it doesn't exist: that it isn't completely impossible to have a recession best explained by supply side frictions . A theory that was originally intended to generally explain all correlated macro cyclicality finally catches a wave after sunbathing through the longest winter and critics better take note!!

If anything Brazil shows the opposite. If it is possible for countries with problems like Brazil to show a significant spikes in unemployed resources with no sharp decline in nominal expectations, and if inflation in generally poorly run countries is so common, why is this combination so unusual to see?

Will genius economists now admit there is not always a path to growth. For a given set of conditions, i.e. population composition, natural resource prices, technology level, there exist an equilibrium level of economic activity.

With the sharp drop in oil price, Brazil temporarily had GDP above the equilibrium level.

If petro nations budgeted like I do in my personal spending, they would have a spending level consistent with the bottom of the oil price of the last 10 years.

Running balanced budgets in boomtimes is a recipe for disaster. The list of petro/resource nations which understand this appear few in number.

The case can be made for spending windfalls to promote productivity and growth in other areas of the economy, but it seems that a fair few petro/resource states use the windfall on unproductive social spending (like, not even education and health, but unambiguously unproductive social spending). And then blame the politicians for delivering what they demanded in the first place ...

Behavioral economists will believe that people usually believe there is a path to growth. There is an optimism bias.

And if you can support that excess optimism, why not?

"Will genius economists now admit there is not always a path to growth. For a given set of conditions, i.e. population composition, natural resource prices, technology level, there exist an equilibrium level of economic activity."

For countries not reliant on natural resources, there's always something you can do to increase the equilibrium--change population composition, improve technology, etc. Countries where that is the case tend to produce leading economists, who treat countries reliant on natural resources as a weird special case (c.f. Dutch Disease).

Say, you're a country that specializes in high privacy financial services, and a technological innovation undermines your business (Switzerland). Or you're a country that specializes in transportation logistics, but the competition can now undercut you (Hong Kong).

Non-resource goods and services can be subject to negative schocks as well, even if we pretend that negative global aggregate demand shocks never happen in ways with outsized effects on certain economies (e.g., Singapore and South Korea).

"Will genius economists now admit there is not always a path to growth" actually there is mate. Reading history books would help you find it.

Monopolistic competition, a control fraud network with oil as only the most recent and prominent node. This extended network was maintained mostly invisible; and persistently across decades its beneficiaries increased market shares, and diffused invisible shares, in every sector. The invisible networks were somewhat invisible to each other, and eventually became so profuse that the needed forensics modules became self-replicating. Symptomatically, various sources say 40 or 60 percent of the elected federal representatives are indicted, more from the opposition than the governing party. The underlying economics of this are quite interesting, apparently a rare instance of an endogenous industrial crisis. Companies too big to fail scattered across sectors, not a financial sector crisis. The cascade of deals unraveling appears mostly responsible for the 3.8 percent GDP fail last year.

One suspects that the structural, if not legal, similarities with the US Congress are apparent to all. Cointegration-wise, then, we can anticipate the soon apparent outcome of November's shakeout in the US, the burning of the hill, will have a calming effect in Brazil, so that several strong dimensions of internal growth can resume, if haltingly, since the refractory period on employers losing their biggest customers is almost as long as that on unemployment.

BTW, Brazil has its own backlog of infrastructural catastrophes, in magnitude close to those of the US.


There was a massive credit expansion in brazil that peaked in 2013 with basic interest rates reaching 7,25% from 12,5% just three months before. State owned banks engaged in agressive balance sheet expansion dragging private bank rates down as well. The real estate sector boomed but experienced intense financial distress shortly after when rates began to rise again.

The Economist says:

"Ironically, Mr Cunha’s move to impeachment may have made Ms Rousseff’s survival until 2018 more likely rather than less. The timing works in her favour. Mr Cunha can easily be painted as self-serving rather than statesmanlike, putting a question-mark over the whole rigmarole. The PT is likely to close ranks in support of its president. And Ms Rousseff will no doubt be more adamant than ever that she is not stepping down of her own accord, as some in the opposition had been hoping. Responding calmly to Mr Cunha, she spoke of her “indignation”.

Well, Mr. Cunha is also being prosecuted. In fact, the four top politicians plus Mr. Lula, the former president and kingmaker, are threatened with impeachment and/or jailtime. Now, remains to be seen if Mrs. Rousseff can get rido of Mr. Cunha before he gets rid of her (or if they decide the only winning move is not playing).

You sound here like someone who needs to see a doctor about possible dementia.

What does the fact that Brazil is having a steep recession say for RBT? Nothing whatsoever. They had big inflows and overappreciated until 2013, started to go bust when the dollar monetary policy cycle turned in 2013 (remember the "fragile five" with big, wait for it, current account deficits?), then crashed when cheap-credit-stimulated commmodity investment and state-bank-stimulated Chinese real estate investment surpassed demand. Everything about Brazil's recession is financial cycle. There is not even the tiniest hint of a real cycle anywhere in there.

They should have paid Norway a modest fee to handle all their oil business and put together a nice wealth fund designed to give a constant supply of funds.

It would be like admitting we can't manage our own money.

People, with price inflation over ten percent, this cannot be an aggregate demand shortfall. And which theory are we then left with?

The real has dropped from about 1.5/USD to 3.5/USD over 5 years. In terms of how many dollars a Real (BRL) buys, that is a 16% drop per year. Depending on which date to start with over the last 2-3 years, the drop in currency value could be a lot more than 16% per year. It does not surprise me that that this causes price inflation.

Included link has a listing of inflation, averaging 6%/year the 4 years preceding 2015, which had 11%. This adds up to 40%, (35% by adding together, 40% by multiplying 1+inflation for each year), compared to a currency that has lost 58% of its international buying power. For the big mac index to stay fixed in Brazil, the big mac price would have to increase by 139%. In other words, Brazil is a bargain for tourists!

Tyler - yes agreed not an aggregate demand shortfall story, but who is arguing that it was? Surely everyone would agree that what Brazil is suffering from is poor governance. The resources sector in Brazil is suffering from lower prices but that only a small part of the economy.

Does Brazil's trials have any relevance to the EU or US slow growth stories? Only in relation to the EU and U.S. having poor governance in certain areas (but not at such a scale.) Does this mean that periods of over investment must inevitably be followed by crashes? Only if Governments don't follow through on their reform policies that generated the investment boom. It's like a company's stock price being driven up by new management saying they will address the problems of the old management, then turning out to be worse. There is no cycle there, just disappointed investors.

Actually, it is AS. In previous research on Brazil's food sector (POF2008-9 over 2002-3), there were numerous instances of supply-driven price increases. Generalizing, it has been the unwinding of the control fraud network in concentrated industries that induced supply-side problems. One forgets sometimes that the "T" in MV=PT is not GDP. Too big to fail is a phenomenon in real economies as well as financial systems. Perhaps another way of thinking about this is as a businessman's rather than banker's crisis.

Are you actually saying that any time there's significant (however defined) inflation it's got to be an RBC situation?

Which pretty much says nothing about the validity of RBC but a lot about the state of macroeconomic "science".

A la "As our first theory has the sign wrong, the only further explanation we can come up with is a negative exogenous technology shock. Brazils computers are suddenly working less quick."


Inflation-driven recessions are of course a favorite topic of financial cycle theories, and Tyler surely knows that. It takes a real stubborn determination to deny reality to hold up such a poster child of financial cycles as Brazil as evidence of RBC.

You can put your irony aside. The point is: there is no RBC theory of a recession. A negative technology shock doesnt exist; it doesnt make any sense.

And even if there is no "explanation" in assuming an "exogenous shock". It is a complete non-sense theory.

The problem with macroeconomics is that it is all tremendous bullshit; it is a bubble in itself. Unfortunately one that cant be easiliy shorted. And you just cant say that because bullshit A does not fit there must be evidence for bullshit B.

Pretty tough to have real business cycle working, I really enjoy myself with Forex trading, it’s a really wonderful business and what makes it really good is, we are able to work without facing any trouble. I’m working with OctaFX broker and with them, I gain so many benefits whether it’s with the giant 50% bonus on deposit offer or if it’s with their daily market news and analysis service, it’s all pretty good and useful for us and helps with trading.

I am brazilian and I can say that is the melancholic scenario. The economy of my country is going down until the bottom. Maybe the impeachment gives us at least a relief.

Food prices world wide have risen for multiple reasons, but the biggest 2 are the fault of the US government. That the fed has massively increased the money supply, and since food prices around the world are in usd, the Fed exported this inflation around the world. And second, the incredibly dumb policy of using food for an inefficient gasoline replacement. Ethanol mandates have sucked up massive amounts of the basic grain, and risen food prices world wide. I cannot recall the exact amount but the UN estimated ethanol mandates raised world food prices 5-10%.

As for the future of Brazil, I do not blame the Brazilians as much as I blame the Fed. None of these leftist/progressive governments would be able to carry out their schemes if it wasn't for the Fed printing money like it was going out of style. The interest rate on government debt would have put an end to all of it. Just as what happened in the US in 1994. But, Greenspan screwed us all and bailed out the US government. The credit markets, if left to their natural course, reign in the progressive state. And progressive politicians cannot continue to bribe the electorate.

As for the idea that some genes, such as Protestantism, are necessary for economic growth, history proves otherwise. Until the 1870s, China and India were always the largest and wealthiest economies. Europe was relatively poor up until that point. What changed? America of course. No longer were Europeans stuck being victims of terrible governments, they could simply get up and leave. This forced European governments to be less worse, along with the greatness of the British Empire 'forcing' liberty on all people. Today, because of the awful border and immigration controls, governments have less competition and those in the developing world pay the highest price. Imagine if we at least had Pan-American citizenship. Brazilians, who produce, would have left in droves, and the government reigned in. Instead, they are stuck in a corrupt and poverty creating state.

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