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Challenges to Disinflation: The Brazilian Experience

Author

Listed:
  • Carlos Carvalho

    (Kapitalo Investmentos and PUC-Rio)

  • Fernanda Nechio

    (Federal Reserve Bank of San Francisco)

Abstract

We review two previous bouts of high inflation and disinflation since Brazil adopted inflation targeting. In both episodes, fiscal sustainability concerns were present and inflation expectations became unanchored despite substantial monetary policy tightening. Disinflation and the reanchoring of expectations took time and proved costly, as both episodes entailed a recession. They required tight monetary policy combined with critical shifts toward structural economic reforms and sound fiscal policy. The ongoing episode features the same fiscal concerns and unanchored inflation expectations. This suggests the path ahead for disinflation will be challenging, unless policies change direction. We also speculate whether the Brazilian experience can provide insights for other countries.

Suggested Citation

  • Carlos Carvalho & Fernanda Nechio, 2023. "Challenges to Disinflation: The Brazilian Experience," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 54(1 (Spring), pages 217-241.
    • Handle: RePEc:bin:bpeajo:v:54:y:2023:i:2023-01:p:217-241
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    File URL: https://www.brookings.edu/bpea-articles/emerging-market-challenges/
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