Not so fast

BRAZIL ECONOMICS - Report 18 Aug 2025 by Alexandre Schwartsman, Cristina Pinotti and Diego Brandao

Despite successive adjustments, the output gap estimated by the Central Bank (BC) has shown little sensitivity to the unemployment rate in recent years. This behavior could be justified by a rapid decline in the NAIRU over the period. However, when estimating it implicitly from the BC’s reference output gap, we see a drop of around 3.9 p.p. since early 2022, almost equivalent to the 4.7 p.p. reduction in the unemployment rate, which seems implausible. Meanwhile, the NAIRU derived from the median of the BC’s multivariate estimates of the output gap shows only a 1.2 p.p. decline over the same period.

On the other hand, our NAIRU estimates, explicitly considering the possibility of a structural break over the period, reject the hypothesis of a recent decline. On the contrary, they suggest the possibility of a modest increase.

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