Can jurisdictional uncertainty and capital controls explain the high level of real interest rates in Brazil? Evidence from panel data

Abstract

This paper tests the assertion, popularized by Arida et al. (2005), that risks associated with the jurisdiction and currency inconvertibility are relevant determinants of the high level of short-term real interest rates in Brazil. The results are by and large unfavorable not only to their conjecture, but also to variants of their argument. The results further indicate that traditional monetary and fiscal factors are far more relevant to explain the level of short-term real interest rates than the binomial jurisdictional uncertainty/ currency inconvertibility is.<br>Esse paper testa a hipütese, popularizada por Arida et al. (2005), de que riscos associados à incerteza jurisdicional e incoversibilidade da moeda nacional são importantes determinantes dos altos níveis da taxa básica de juros no Brasil. Os resultados dos testes são bastante desfavoráveis não apenas a essa hipotese, mas também a variantes dela. Os resultados também indicam que fatores tradicionais fiscais e monetários são bem mais relevantes para explicar o nível da taxa básica de juros, em comparação ao par incerteza jurisdicional/incoversibilidade da moeda

A panel-data analysis of interest rates and dollarization in Brazil

“…We tested whether our policy-environment variables -restrictions to dollarization, rule of law, and capital account liberalization -had some direct explanatory power on the real interest rate and the results were negative. This confirms and expands a result by Gonçalves et al (2007) that -contrary to a presumption in Arida et al (2005) -also found that jurisdictional uncertainty (measured by rule of law as here) and capital account controls (measured by a different index from ours) were not significant explanatory variables for the real interest rate.…”

“…A conjecture about the relationship between the high level of real interest rates and the quality of institutions, proxied by jurisdictional uncertainty and currency inconvertibility, is developed in Arida et al (2005). However, the results presented in Gonçalves et al (2007), using panel data analysis, were by and large unfavorable to the hypotheses posed in that paper. This paper empirically reconsiders the debate, stressing the role of systemic risk and dollarization on the determination of real interest rates in emerging market economies.…”

Raising Investment in Brazil

“…In the view of Arida et al (2005), insufficient property rights protection increases the country risk premium unnecessarily and thereby exerts upward pressure on domestic interest rates, while International Commission of Jurists (2008) suggests that there is scope for enhancing the efficiency of Brazil's judiciary. Gonçalves et al (2007) test different variants of the jurisdictional uncertainty hypothesis and fail to find much empirical support for it, with similar evidence reported in Bacha et al (2009). Pessoa and Nakane (2011) make the point that even if the evidence does not confirm jurisdictional uncertainty as a major determinant of the level of basic interest rates in Brazil, it does help to explain the high level of intermediation spreads referred to below.…”

Quinze anos de rigidez monetária no Brasil pós-Plano Real: uma agenda de pesquisa

“…De fato, no único estudo empírico sobre o tema, Gonçalves et al (2007) não encontram evidência favorável à tese.…”