The natural interest rate and the Taylor rule in Brazil
with Fernando de Holanda Barbosa and Felipe Diogo Camêlo.
Published at the Revista Brasileira de Economia.
This paper estimates the natural rate and the Taylor Rule for the Brazilian economy from 2003 to 2015. The natural rate in a small open economy is equal to the international real rate of interest, adjusted for the premium due to country risk and exchange rate risk. This framework allows decomposing the interest rate into components to understand why the Brazilian interbank market rate is so high when compared to other countries. This natural rate is not constant and we use it to estimate the Taylor rule. We test the hypotheses that the Brazilian central bank has changed its response to inflation, output and exchange rate during President Dilma Roussef’s first mandate. We cannot reject this hypothesis with respect to inflation and output gaps.