Cochrane and Lara Resende disagree on interest rates, public accounts and inflation in the debate on Brazil

A debate between two high-level economists has exposed divisions over the conduct of monetary policy in Brazil. According to Estadão, John H. Cochrane does not completely accept the idea of ​​cutting interest rates by force, a proposal that André Lara Resende, one of the minds behind the Real Plan, usually defends.

Cochrane is a senior fellow at the Hoover Institution at Stanford University. According to Estadão, he considers Lara Resende's recipe for fiscal imbalance to be economically sophisticated, but remains always cautious with the idea of ​​reducing inflation by cutting interest rates. For him, the proposal has no historical precedent.

The starting point of the discussion is fiscal imbalance, which appears as one of the causes of inflation. When public accounts do not close, pressure on prices tends to persist, and this changes the weight that the interest rate can have on the problem.

Cochrane also questions the conventional framework of central banks, which combats inflationary pressure mainly by raising interest rates. By calling this logic into question, he expands the debate beyond a specific technical choice, in line with the framework of international economic discussion on the country's monetary guidelines.

Lara Resende, in turn, classifies Cochrane as a highly qualified orthodox macroeconomist. The exchange of praise maintains the technical tone of the confrontation, which revolves around a central question: is it possible to tame inflation with lower interest rates without first facing the problem of public accounts?

What changes for the investor

For those who invest in the stock market, Nasdaq, interest rates and the dollar, the central point is the predictability of monetary policy. If the debate moves towards lower interest rates without an adjustment in public accounts, the fiscal and inflationary risk reading tends to weigh on variable income assets and the exchange rate. A policy that combines fiscal responsibility with a clear interest rate trajectory tends to reduce uncertainty. None of this is a price forecast, and the most prudent thing is to monitor how the government and the Central Bank treat accounts and inflation before making any decision.

Automatically translated from Portuguese.