Estimation of Short and Long Run Adjustment Speeds in a Co-integrated System in the Money Market: the Case of Brazilian Deposit and Lending Rates
Thai Nguyen, Ph.D.

Abstract
This paper aims to calculate the adjustment speeds between the Brazilian Deposit and Lending (D-L) rates –both in the short and long runs- over the months between January 1997 and June 2016. Tests for stationary and cointegration, and finally, the error correction model (ECM) are employed with the ultimate objective: how Brazilian average commercial interest rates interacted during the sampled months? The deposit rates statistically are found to have a significant impact on the lending rates. Both rates are also found to be non-stationary at their level – but became stationary with an integrated order of one upon their first difference. Therefore, the ECM is employed in order to find how fast both rates adjusted toward respective equilibriums. The results are that the two series statistically displayed a monthly short-run speed of about 41.68% toward equilibrium, and their longrun adjustment is about 21.66% per month. Those speeds suggest that the Brazilian money market is not competitive and monetary policy has a relatively small effect on the difference between Brazilian D-L rates.

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