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

In this context, it is thus clear that the process of currency appreciation must be reversed. In the wider debate surrounding the Brazilian macroeconomic regime, the problem is that currency appreciation has been an important factor in order to achieve inflation goals. Halfway through the current decade a strong cycle of commodity price increases began, which in practical terms meant a supply shock that, without intervention, would provoke an increase in Brazil’s inflation rates. However, currency appreciation in this period ameliorated this shock and prevented it from being transmitted to domestic prices (Serrano & Ferreira, 2010: 53). Figure 2 shows how currency appreciation provided some protection during this period. In this case, it can be seen that the increase in the commodities index crb in reales was below the amount in dollars, which means that only some of the increase in commodities prices was transmitted to the Brazilian economy.

Figure 2. cbr Index (dollars and reales)

Source: Prepared by the authors based on data from the Central Bank of Brazil and unctad.

However, the importance of appreciation of the exchange rate in controlling Brazil’s inflation was not restricted to the recent period of increases in the international price of commodities. According to Barbosa-Filho (2009), with the exception of 1999, inflation goals in the period 1999-2006 were only met in years when the exchange rate appreciated in nominal terms, that is, in 2000, 2004, 2005 and 2006 (Barbosa-Filho, 2009: 142). According to this work, this relationship was due to the fact that following privatizations in the 1990s, the prices for some public utilities began to follow price indices that were very influenced by the exchange rate23, among other reasons (Barbosa-Filho, 2009: 140).

In this context, it is clear that currency appreciation is essentially an important mechanism to reach inflation goals, and has been since the regime was adopted (Serrano, 2010: 65). In this case, the problem is that as long as currency appreciation is not the intention of the Central Bank, the most appreciated exchange rate is a by-product of the monetary policy executed to meet inflation goals. By increasing interest, the monetary authority ends up increasing the differential between the domestic rate and foreign rates, attracting foreign capital and causing the exchange rate to appreciate even more.

The problem is that, as we saw before, the tendency for the exchange rate to increase brings along key risks regarding the economic structure. In this way, there seems to be an impasse: if, on the one hand, currency appreciation implies the risk of deindustrialization, on the other hand, allowing a more devalued exchange rate will have consequences for domestic inflation. This set of factors seems to indicate an impasse in terms of economic policy.24

23 Another reason is that negotiable goods are, due to their very nature, influenced by exchange rate behavior.

24 Oreiro (2011) also came to the same conclusion.

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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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