By Brazil Stock Guide — John Cochrane, a senior fellow at Stanford University’s Hoover Institution, has described André Lara Resende’s case for lowering Brazilian interest rates as “economically sophisticated” and coherent.
A key intellectual influence on the Brazilian economist, Cochrane acknowledges that lower rates could ease the government’s debt-servicing burden without necessarily fueling inflation. His assessment, however, hinges on fiscal credibility and includes significant reservations about implementation.
In Fisher and Resende in Brazil, published Tuesday afternoon on his Substack, The Grumpy Economist, Cochrane examines whether Brazil can break a cycle in which high real interest rates worsen public debt dynamics and undermine confidence in the sustainability of government finances.
He agrees that reducing interest expenses without weakening the primary fiscal balance—the budget balance before interest payments—would substantially improve Brazil’s fiscal position. The crucial question, he argues, is whether the central bank can achieve that simply by cutting its benchmark Selic rate.
A former University of Chicago professor and past president of the American Finance Association, Cochrane is the author of Asset Pricing, which earned him the TIAA-CREF Institute’s Paul A. Samuelson Award, and The Fiscal Theory of the Price Level. The latter develops a framework in which price stability depends on expectations that future government revenues, net of spending, will back outstanding government liabilities.
His intellectual connection with Lara Resende predates the current controversy. The Brazilian economist explored the fiscal theory of the price level and the neo-Fisherian hypothesis in his 2017 book Juros, moeda e ortodoxia (Interest Rates, Money and Orthodoxy). In a subsequent interview with Brazilian financial newspaper Valor Econômico, he explicitly credited Cochrane with the conjecture that interest rates and inflation could move in the same direction, challenging the conventional interpretation. Cochrane is now assessing how those ideas might be applied to Brazilian economic policy.
Under the proposal, Lara Resende advocates creating a fiscal and monetary council to set coordinated targets for both policies. The transition would involve gradually lowering the benchmark rate over roughly 12 months to around 7.5%. Subsequently, unless the council authorized an exception, rates would remain within a band bounded by the inflation target and the economy’s potential nominal growth rate—currently estimated by Lara Resende at 3% and 5.5%, respectively.
Cochrane acknowledges the strategy’s theoretical foundation. When higher rates increase debt-servicing costs without a credible prospect of future fiscal balances sufficient to cover them, they can intensify inflationary pressure. By the same logic, lower rates could ease that pressure. The essential condition is that the government preserve the savings rather than spend them or give them away through tax cuts.
The structure of Brazil’s debt also supports part of the argument, he says. The substantial share of government securities linked to the Selic means that interest expenses can fall relatively quickly when the benchmark rate declines. It also weakens one theoretical mechanism through which a rate cut could initially fuel inflation: an increase in the value of outstanding long-term, fixed-rate bonds held by investors. Cochrane considers this argument relevant but cautions that other inflationary channels may still operate.
His main concern is the strength of the fiscal commitment. Four- or five-year targets and promises to streamline revenues and spending would be insufficient to secure lasting confidence. The proposal would need to convince investors that Brazil will deliver primary fiscal balances capable of supporting its debt for years and decades, including through recessions and crises. He therefore calls for reforms and institutions that can sustain that commitment through political and economic changes.
There is also a question about the limits of central bank power. Controlling the nominal Selic rate does not necessarily mean determining real interest rates or the risk premiums investors demand. If Brazilian rates partly reflect concerns about inflation and debt repayment, those premiums could persist after a cut.
Cochrane also questions the proposed use of foreign-exchange reserves to contain a potential currency depreciation. If the strategy strengthens fiscal sustainability and confidence, he argues, the Brazilian real should appreciate.
Ultimately, Cochrane favors a package of fiscal, monetary and growth-oriented reforms, for which he sees successful historical precedents. He says he knows of no precedent for Lara Resende’s specific approach and stresses his limited knowledge of Brazil’s economy and politics. Nevertheless, his assessment recognizes the coherence of a hypothesis that challenges conventional monetary policy. The disagreement concerns the conditions needed to turn that theoretical possibility into a policy that works in Brazil.
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