Denise Piper

The central objective of this study is to analyze the dynamics of the benchmark interest rate of Brazilian economy over the period extending from the introduction of Inflation Targeting Regime in the country. It is argued that, during the period considered, the aforementioned rate exhibits accented inertial behavior and prominent resistance to falling. Empirical investigations are performed regarding the functional form of the policy rule followed by national monetary authorities, as well as is tested, through VAR and SVAR models, an own explanation for the preservation of high interest rates in the country, explanation that is based on the effects of Brazilian’s industrial productivity over the Selic rate. The results obtained bequeath the finding that the inertia’s degree of Brazilian’s basic interest rate is extremely high, reaching a level of 0.924, implying that the major source of influence over the current values of the Selic rate consists in its own lagged values. Furthermore, it is verified that, among the macroeconomic variables that affect, to some extent, the process of interest rate determination by national monetary authorities, may be pointed out, in order of importance, the difference between expected inflation and the predetermined target, the output gap and the real effective exchange rate. Finally, the estimated models show that there is, in Brazilian economy, an inverse relationship between benchmark interest rate and industrial labor productivity in the long run, suggesting that the incentive to increase productivity can help to solve the problem of high interest rates in the country in an extended time horizon.