Real Interest Rate Parity between Brazil and the United States (2001-2022)

• Autor(a) principal: Costa, Diogo Antunes de Siqueira
• Data de Publicação: 2022
• Tipo de documento: Dissertação
• Idioma: eng
• Título da fonte: Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)
• Texto Completo: http://hdl.handle.net/10071/25981
• topic: Política monetária -- Monetary policy; Interest parity; Real Interest Rates; Structural breaks; Paridade de juros; Taxas de juros reais; Quebras estruturais

The present Dissertation aims to verify the validity of the Real Interest Rate Parity (RIRP) condition between Brazil and the United States. Real interest rates are at the core of modern macroeconomics and monetary policy analysis. Based on data from the Central Bank of Brazil (Banco Central do Brasil, BCB) and the United States Federal Reserve from 2001 to 2022, we evaluate the Brazilian capital market integration with the rest of the world as the real interest rate equalization is a crucial indicator in order to achieve the said integration. Assuming no restrictions on arbitrage in goods and financial markets and rational expectations, the RIRP condition suggests that real interest rates tend to equalize across countries. Despite the intuitive appeal of the RIRP, empirical evidence is inconclusive, with quite mixed findings and results in the academic literature. Using unit root analysis, we assess the convergence of real interest rates in Brazil to the international benchmark (the United States real interest rate), thus confirming the RIRP hypothesis. More specifically, we conclude that the stationarity of real interest rate differentials must be evaluated under the prism of multiple structural breaks. Furthermore, if real interest rates in Brazil depend on factors beyond the scope of domestic monetary policymakers, monetary policy independence (at least in its conventional form) is limited.