Brazil in the 21st Century: How to Escape the High Real Interest Rate Trap?
The bulk of the difficulties Brazil faced in 2002 stemmed from the uncertainty associated with the course of the future economic policy to be followed by the new administration and from the sustainability of the public debt. To avert a painful default, real interest rates must fall and sustained growth must resume. To increase the chances of success, several policy measures are suggested:
- To further the integration of Brazilian and international financial markets;
- To increase the exportability of the economy;
- To increase the fiscal effort, in order to help dispel doubts over the sustainability of the public debt;
- To increase the credibility of the monetary authority, by conferring instrument independence on the Brazilian Central Bank; and
- To resume efforts to lengthen the debt profile, while reducing the indexation to the exchange rate and to the Selic short term rate, by making larger use of inflation-linked bonds.