Inflação e Estabilização: Algumas Lições da Experiência Brasileira

This article has two parts. In the first we analyze the reasons for the persistence in the rates of inflation in Brazil, and describe the diagnosis that prescribed the monetary reform of 1994. In the second part we concentrate on the economic policy after the monetary reformo Inflation inertia was generated by the generalized indexation of prices, wages and the exchange rate. Money passivity increased the persistence in the rates of inflation, impeding the dissipation of irlflationary shocks. In spite of high fiscal deficits the public debt did not have an unsustainable growth, due to the combined effect of segniorage,to the "Patinkin effect" acting on public expenditures, and to the relatively low real interest rates in comparison to the rates of growth of GDP. The monetary reform of 1994 has eliminated indexation practically over night, and exchange rate started to function as a nominal anchor since the moment in which the Central Bank adopted a crawling peg regime.The second part concentrates on the effects of the (lack of) fiscal policy, the appreciation of the exchange rates and the high rates of interest in stabilizing prices in the short run, but in increasing Brazilian vulnerability to speculative attacks, in the long-run. The stabilization plan has not produced a fiscal reformo Combined with the appreciation of the exchange rate that occurred in the short period immediately after the monetary reform, the expansionary fiscal Policy produced rising current account deficits. In order to maintain an overvalued exchange rate in the presence of high fiscal deficits,the real interest rate has been kept in extremely high leveis, increasing even further the fiscal deficit. Fixed exchange rate arrangements combined with a high international capital mobility, with a an expansionary fiscal policy and a contractionary monetary policy, are a very efficient recipe to produce speculative attacks. During the period covered by the present analysis Brazil received the effects of the Mexican and the South East Asia crisis, and reacted to both increasing interest rates to preserve the exchange rate regime, but has never produced a sufficient fiscal contraction. The two consequences where a very low rate of growth of GDP, and a permanent vulnerability to speculative attacks.