Are High Interest Rates an Example of Neoliberal Monetary/Fiscal Policy?

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Question: 

I was reading a paper on authoritarianism in Brazil, and was puzzled by some things the authors had to say regarding the country's fiscal/monetary policy. According to the paper, the policies of the ruling PT party were largely neoliberal throughout the growth of the 2000s, and high interest rates were a component of such policies. Generally, the paper describes Brazil's neoliberal policies as "contractionary."

This is very confusing to me, as coming of age in a post-GFC United States I've always associated neoliberalism with things such as low interest rates. Any help on this would be greatly appreciated.

Answer: 

Thank you for your question! These ideological "definitions" and distinctions can be quite confusing and arbitrary. In the Latin American context, usually neoliberal is associated with policies that are orthodox, that is, based on notions of free market and minimal intervention by the government. That includes, among others, balanced government budgets and independent central banks with mandate to control inflation through "usual" monetary policy like short term interest rates (and flexible, market-determined exchange rates). With the history of hyperinflation in Brazil, this basic approach has been followed since 1994, and in earnest since the unpegging of the Brazilian currency since 1999. To control inflation and attract foreign capital, the government had kept relatively balanced budgets and high interest rates even if that would potentially reduce the rate of economic growth. That is likely what the article you read meant by considering those policies "contractionary."

Usually in Latin America neoliberal is synonym with the "Washington Consensus:" https://en.wikipedia.org/wiki/Washington_Consensus

(As always, read Wikipedia entries with clear-eyed Skepticism, especially in smaller details).

Note that during Mr. Silva's second term and Ms. Roussef terms (second one cut short by her impeachment) the fiscal policy became more lax, running bigger deficits. Recently, the interest rates in Brazil reached a record low, partially due to the worldwide fall in rates and partially by the relative success in some difficult reforms that will make it easier to balance the budget in the future (by curtailing retirement payments and increasing retirement ages among other things).

The policies in the US since the GFC can be called neoliberal in the sense that tend to be market driven, and even the big deficit spending in the aftermath of the GFC was justified by the severity of the crisis. The running of large deficits after the recovery was in better footing would certainly fly on the face of the usual definitions of neoliberal.

Answered by:
Dr. Otavio Bartalotti
Assistant Professor
Graduate Placement Officer
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Last updated on May 5, 2020