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From Inertia to Megainflation: Brazil in the 1980s

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  • Eliana Cardoso

Abstract

This paper discusses the acceleration of inflation in Brazil. In the early 1980s, the Brazilian inflation rate increased in good measure because of the balance of payments crisis and because of large depreciations of the cruzeiro. The Cruzado Plan failed to stop inflation because of an extremely loose monetary policy coupled with a lack of fiscal austerity. Repeated price controls have increased the variability of inflation. More recently, the decline in tax collections and the growth of interest payments on a ballooning domestic debt have built up a massive fiscal problem. Flight from money has further aggravated Brazilian inflation. Two steps are used in explaining the Brazilian inflationary process: the analysis of price freezes in the context of sustained fiscal imbalance and the research on the consequences of different fiscal deficit financing forms. The paths of inflation and real cash balances in response to different shocks are simulated. The focus is on the effects of controls that impose a temporary reduction of the inflation rate under different choices for monetary and fiscal policies. A model of an open economy where agents can hold money, domestic bonds and inventories of goods clarifies the linkage between Brazil's growing inability to finance the public sector deficit externally after 1982 and the acceleration of inflation.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3585.

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Date of creation: Jan 1991
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Publication status: published as Bruno, Michael, et al. (eds.) Lessons of economic stabilization and its aftermath. Cambridge, MA and London: MIT Press, 1991.
Handle: RePEc:nbr:nberwo:3585

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  1. Persio Arida & André Lara Resende, 1985. "Inertial inflation and monetary reform in Brazil," Textos para discussão, Department of Economics PUC-Rio (Brazil) 85, Department of Economics PUC-Rio (Brazil).
  2. Eliana A. Cardoso & Rudiger Dornbusch, 1987. "Brazil's Tropical Plan," NBER Working Papers 2142, National Bureau of Economic Research, Inc.
  3. Rudiger Dornbusch, 1985. "Stopping Hyperinflation: Lessons from the German Inflation Experience of the 1920s," NBER Working Papers 1675, National Bureau of Economic Research, Inc.
  4. Peter J. Montiel, 1989. "Empirical Analysis of High-Inflation Episodes in Argentina, Brazil, and Israel," IMF Staff Papers, Palgrave Macmillan, vol. 36(3), pages 527-549, September.
  5. Alain Ize & Guillermo Ortiz, 1987. "Fiscal Rigidities, Public Debt, and Capital Flight," IMF Staff Papers, Palgrave Macmillan, vol. 34(2), pages 311-332, June.
  6. Eliana Cardoso, 1989. "The Macroeconomics of the Brazilian External Debt," NBER Chapters, in: Developing Country Debt and the World Economy, pages 81-100 National Bureau of Economic Research, Inc.
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Cited by:
  1. Ernesto H. Stein & Jorge M. Streb, 1999. "Las elecciones y el momento de las devaluaciones," Research Department Publications, Inter-American Development Bank, Research Department 4165, Inter-American Development Bank, Research Department.
  2. Ernesto H. Stein & Jorge M. Streb, 1999. "Elections and the Timing of Devaluations," CEMA Working Papers: Serie Documentos de Trabajo. 140, Universidad del CEMA.
  3. Yashiv, Eran, 1998. "Capital controls policy an intertemporal perspective," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 22(2), pages 219-245, February.
  4. Garcia, Marcio G. P., 1996. "Avoiding some costs of inflation and crawling toward hyperinflation: The case of the Brazilian domestic currency substitute," Journal of Development Economics, Elsevier, Elsevier, vol. 51(1), pages 139-159, October.
  5. Ernesto H. Stein & Jeffry Frieden & Piero Ghezzi, 2000. "Politics and Exchange Rates: A Cross-Country Approach to Latin America," Research Department Publications, Inter-American Development Bank, Research Department 3119, Inter-American Development Bank, Research Department.

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