Is Brazil Different? Risk, Dollarization, and Interest Rates in Emerging Markets / Márcio Holland, Edmar L. Bacha, Fernando M. Gonçalves.

Format:

Book

Government document

Author/Creator:

Holland, Márcio.

Contributor:

Bacha, Edmar L.

Gonçalves, Fernando M.

Series:

IMF Working Papers; Working Paper ; No. 2007/294

IMF Working Papers

Language:

English

Physical Description:

1 online resource (27 p.)

Edition:

1st ed.

Place of Publication:

Washington, D.C. : International Monetary Fund, 2007.

Language Note:

English

Summary:

We investigate the role of financial dollarization in the determination of real interest rates in emerging economies. In a simple analytical model, we show that a strategy of "dedollarizing" the economy, if it fails to address fundamental macroeconomic risks, leads to higher domestic real interest rates. We confirm this prediction in an empirical model, but find that the effect is small after controlling for the risks of dilution and default. Brazil provides a natural case study given its low degree of financial dollarization and very high real interest rates. The estimated model is unable to explain the high interest rate levels in the aftermath of Brazil's 1994 inflation stabilization. However, since the adoption in 1999 of inflation targeting and floating exchange rates, Brazil's real interest rates are gradually converging to the model's predicted values. The estimation also shows that further drops in Brazil's real interest rates could be achieved more effectively through improvements in fundamentals that lead to investment-grade status rather than through financial dollarization.

Contents:

Contents; I. Introduction; II. Analytical Model; III. Data and Estimation Methods; IV. Empirical Findings; V. The "Mystery" of High Interest Rates in Brazil; VI. Conclusions; Tables; 1. Basic Statistics; 2. First-Step Estimation; 3. Second-Step Estimation; 4. Interest Rates and Prices; Figures; 1. Two-Step Empirical Strategy; 2. Onshore and Offshore Deposit Dollarization in Latin America, 2001; 3. Real Interest Rates; 4. Real Interest Rate in Brazil: Actual, Predicted, and Implied; Appendix: Data Sources and Procedures; References

Notes:

Description based upon print version of record.

Description based on publisher supplied metadata and other sources.

ISBN:

9786613828507

9781462343706

1462343708

9781451991338

1451991339

9781283516051

1283516055

9781451913101

1451913109

OCLC:

560672823