Price-Level-Adjusted Mortgages in Brazil

Brazil has adopted price-level indexation of financial contracts to a much greater degree than any other country. Indexation was adopted during the mid-1960s, following a period of extremely high and volatile inflation, in response to virtual stagnation in financial markets and a host of related problems. Although there is considerable controversy over the ex ~nt to which indexation has contributed to Brazil’s subsequent economic growth and the diminution of inflation, there is little question that, in combination with reductions in the rate of inflation, it has been a major factor in revitalizing financial markets and increasing the volume of funds available for housing. Virtually all mortgages are price-level adjusted and, in the majority of cases, are financed directly or indirectly by indexed liabilities. Of special interest to this study is the fact that various government-controlled pension funds, whose liabilities (benefits) are price-level indexed, are major suppliers of mortgage credit. Since mortgage indexation is part of a much more general scheme, we begin with a brief overview of indexation in Brazil.