Natural rate of interest estimates for brazil after adoption of the inflation targeting regime

This paper estimates the natural rate of interest (NRI) for Brazil between the third quarter of 1999 and the second quarter of 2019. The seminal model proposed by Laubach and Williams (2003), re-specified by Holston, Laubach and Williams (2017), is used. Results indicate an NRI with a downward trend, with the lowest values during the 2015-2016 recession. In the last observation of the sample, the NRI was 1.8% for the ex-ante rate. Analyzing the difference between the real interest rate (RIR) and the NRI, we identify three distinct periods in the conduction of Brazilian monetary policy. The first one, from 1999 to 2007, is called adaptation phase and is characterized by a contractionary policy after the adoption of the inflation-targeting regime. The average RIR was 12.2% for the period compared to an average NRI of 6.9%. The second period, from 2007 to 2014, the policy stance went from a neutral to expansionary, with an average RIR of 5.0% compared to an NRI of 7.1%. The third period began in 2015 and was characterized by a contractionary impulse in a recessive economic environment. In that period, the average RIR was 5.6% against an NRI of 3.5%. For the sake of comparison and robustness, the NRI was estimated using an alternative method, based on Basdevant, Björksten and Karagedikli (2004). The estimation produced similar results to the ones mentioned above. Both models show a continuous reduction in the NRI over time, in line with the empirical literature for developing countries. It is important to notice that our estimates indicate a reduction in the NRI gap between Brazil and other countries. This result may imply that the period of abnormally high real interest rates in Brazil is over. They also show that Brazilian Central Bank extended the last contractionary cycle even after the inflation surge of 2015 had been purged.