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Severe recession with inflation: the case of Brazil

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  • João Sicsú
  • Andre de Melo Modenesi
  • Débora Pimentel

Abstract

Severe recessions usually occur in the company of deflation. However, Brazil displayed atypical results in 2015, with a severe recession and double-digit inflation at the same time. Fisher delivered the classical explanation for severe recession and dramatic price level variation. Inspired by Fisher’s model, we elaborated on an explanation for the case of Brazil. The country displayed the essential elements of Fisher’s model: debt disturbances and price-level disturbances. A contractionary fiscal policy triggered the recession, and once contraction started, the price level moved upwards dramatically. Among the government’s spending cuts were subsidies to intermediate inputs. Once the prices of these inputs increased, the general price level followed. In the presence of a recession, nonfinancial corporations saw their costs soar. As a result, they could not entirely pass on the rise in production costs to retail prices. With fewer revenues and smaller profits, production was discouraged. The over-indebted companies decided to use their available resources to pay off debts and avoid bankruptcy, instead of increasing production. Thus, we concluded that a specific type of inflation and the companies’ over-indebtedness could severely aggravate recession.

Suggested Citation

  • João Sicsú & Andre de Melo Modenesi & Débora Pimentel, 2021. "Severe recession with inflation: the case of Brazil," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 44(1), pages 89-111, January.
  • Handle: RePEc:mes:postke:v:44:y:2021:i:1:p:89-111
    DOI: 10.1080/01603477.2020.1835497
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    Cited by:

    1. Leonardo Nascimento & Takeshi Kuramochi & Niklas Höhne, 2022. "The G20 emission projections to 2030 improved since the Paris Agreement, but only slightly," Mitigation and Adaptation Strategies for Global Change, Springer, vol. 27(6), pages 1-24, August.
    2. Aloisio S. Nascimento Filho & Hugo Saba & Rafael G. O. dos Santos & João Gabriel A. Calmon & Marcio L. V. Araújo & Eduardo M. F. Jorge & Thiago B. Murari, 2021. "Analysis of Hydrous Ethanol Price Competitiveness after the Implementation of the Fossil Fuel Import Price Parity Policy in Brazil," Sustainability, MDPI, vol. 13(17), pages 1-12, September.

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