Inflation Targeting, Debt, and the Brazilian Experience, by Francesco Giavazzi, Ilan Goldfajn, Santiago Herrera

By Francesco Giavazzi, Ilan Goldfajn, Santiago Herrera

Inflation targeting-when principal financial institution regulations set particular inflation expense objectives-is normal by means of either built and constructing international locations around the globe (although now not through the USA or the ecu crucial Bank). This choice of unique essays seems at how Brazil's coverage of inflation focusing on, coupled with a floating alternate expense, survived a chain of serious monetary shocks and examines the coverage classes that may be drawn from Brazil's experience.After a profitable begin in early 1999, Brazil's coverage regime needed to deal with mounting problems, together with a unexpected reversal of capital flows and its results at the trade cost and public debt, the contagion of Argentina's critical financial difficulties, a family power trouble, and the political uncertainty of the 2002 presidential crusade. The individuals, favorite Brazilian and foreign economists, draw vital classes from Brazil's adventure, together with the need of accompanying financial coverage with monetary development, the trade-offs excited by dollar-linked debt, the significance of monetary associations in an rising marketplace financial system, and the significance of preserving inflation less than keep an eye on.

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Additional resources for Inflation Targeting, Debt, and the Brazilian Experience, 1999 to 2003

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Pastore and M. C. 4 The Economic Growth Slowdown Much of the problems associated with the sustainability of the public debt derive from the high real interest rates and low economic growth rates in Brazil. We show that increases in the real interest rate decelerates economic growth, either by reducing the flow of gross investments and decelerating the growth rate of the capital stock, or by reducing the degree of capital utilization, leading to a decline in the output– capital ratio. But the recent deceleration of economic growth cannot be accounted alone by the real interest rate behavior.

During 2001, Brazil experienced an economic slump, caused by moderate rises in interest rates and the effects of the electricity shortage, while in 2002, the economy rebounded soundly, with stable or falling interest rates until the third quarter. Finally, in 2002, the real exchange rate was significantly more depreciated than in 2001. However, since pass-through is endogenous to monetary policy, its behavior is also consistent with the fact that after the success of keeping inflation within the target interval in 1999 and 2000, the credibility of the central bank’s commitment to the targets reached its highest point in 2001, which tended to reduce the passthrough.

4. The agreement was concluded before the results of the elections were known, but all candidates were informed of the agreement. 5. The real interest rate was calculated by ‘‘deflating’’ the Selic rate by inflation, as measured by the IPCA accumulated over the past 12 months. 6. Another source of this rise was the recognition of debts that previously were not included in the public debt statistics. See Goldfajn (2003). Chapter 1: Fiscal Policy, Inflation, Balance of Payments 39 7. This figure also excludes the external public debt.

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