Volume 43, Number 171,
October-December 2012
Argentina and Brazil:
Macroeconomic Challenges
Eduardo Bastian and Elena Soihet

The Brazilian Macroeconomic Regime (1999-2010)

After abandoning the exchange rate peg in January 1999, following a speculative attack, the Brazilian government adopted the inflation goals regime in June of the same year. However, the change in regime did not imply a break with orthodox economics. The inflation goals regime is an institutional structure based on orthodox tenets, which establish the following, among other items: 1) There is no long term trade-off between product (employment) and inflation; 2) A nominal anchor is key to guarantee good results from the monetary policy3 (Mishkin, 2007: 1). In this way, the strength of an inflation goals regime is that it functions better as a nominal anchor than other monetary regimes4 (Mishkin, 2007: 11). In this way, substituting the inflation goals regime for the exchange rate peg was really just a change in the Brazilian economy’s nominal anchor.

According to Bogdanski et al. (1999) and Barbosa-Filho (2009), the inflation goals regime that Brazil adopted has the following configuration, among other items: 1) To determine compliance with goals the Broad Consumer Price Index was chosen (IPCA, Índice de Precios al Consumidor Amplio), calculated by the ibge, including the most unstable prices; 2) The goals included a variable interval of tolerance both up and down (initially 2%, later increased to 2.5%, and reduced again to 2% in 2006); 3) The goals and tolerance intervals would be fixed by the National Monetary Council (cmn, Consejo Monetario Nacional)5, one and a half years in advance; 4) The goal set would have to be met within 12 months, calendar year; 5) If the goal was not met, the president of the Central Bank of Brazil had to write an open letter to the Ministry of Economy explaining the reasons why the goal was not met (Bogdanski, et al., 2000: 11; Barbosa-Filho, 2009: 140-141).

On the other hand, from the point of view of the fiscal regime, the idea was to achieve — through fiscal discipline — greater primary surpluses/gdp to reduce the Public Sector Liquid Debt/gdp, increase debt payment periods and increase participation of pre-set roles. This new fiscal regime, inaugurated in 1999, would be complemented by the Law for Fiscal Responsibility (Complementary Law from May 4, 2000), which restricted the ability of state and municipal governments to apply for loans, establishing spending limits with employees and for the public debt. These measures would demonstrate commitment with fiscal solvency.

Finally, Brazilian macroeconomic policies were complemented with a flexible exchange rate. Following the currency crisis at the end of the 1990s, the idea that fixed exchange regimes leave countries much more vulnerable to the eventual drain of capital began to gain ground, obligating these countries to accumulate currency reserves. In this way, to eliminate risks associated with fixed exchange and to make monetary policy more independent, Brazil opted for a regime of currency flexibility.

To summarize, the post-1999 Brazilian macroeconomic regime was made up of a tripod of inflation goals, flexible exchange and primary surpluses in public accounts.

3 A nominal anchor is “ a nominal variable that the monetary authority uses to tie together price levels, for example, the inflation rate, the exchange rate or the money supply” (Mishkin, 2007: 4).

4 According to Mishkin (2007), this would have the following advantages, among others: 1) easily understood by the public; 2) increased accountability for the central bank, as it would have to meet a previously specified goal known to the agents; 3) it would place inflation control, which the bank could achieve best in the long term, at the center of the debate on monetary policy; 4) there was no need for a stable relationship between currency and inflation, unlike what happens when there are monetary goals (Mishkin, 2007: 12-13).

5 Made up of the Ministries of Treasury and Planning and the President of the Central Bank.

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Published in Mexico, 2012-2018 © D.R. Universidad Nacional Autónoma de México (UNAM).
PROBLEMAS DEL DESARROLLO. REVISTA LATINOAMERICANA DE ECONOMÍA, Volume 49, Number 195 October-December 2018 is a quarterly publication by the Universidad Nacional Autónoma de México, Ciudad Universitaria, Coyoacán, CP 04510, México, D.F. by Instituto de Investigaciones Económicas, Circuito Mario de la Cueva, Ciudad Universitaria, Coyoacán,
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