Constitutional Mandates Weaken Monetary Policy

Brazil’s charter predetermines most spending and layers on subsidized credit and sectoral tax breaks, forcing the central bank to run very high real rates (~10%) to restrain inflation. That crowds out investment and even raises the government’s own borrowing costs while insiders access discounted credit. The macro problem isn’t just fiscal size but fiscal rigidity that blunts rate hikes. — It shows how legal budget rules can neuter monetary tools, implying macro stabilization often requires constitutional and subsidy reforms, not just central-bank actions.