Abstract

This article assesses the impacts of Brazil’s exchange-based stabilization plan
(Plano Real) on the country’s external financial fragility and discusses alternative exchange
policy to overcome the Brazil’s external vulnerability. In order to do so, we have developed
an index for this external financial fragility, which is applied to a time series of foreign sector
variables from 1992 to 1997. The evidence shows that Brazilian external financial fragility has grown during the first three years and half after the Real Plan, particularly in 1996
and 1997. Using this evidence, the paper questions the effectiveness of the government’s
adjustment strategy for the industrial sector, based on four pillars: price stabilization, trade
and capital liberalization and exchange appreciation. Finally, we conclude that the scope
for changes in currently exchange policy is too small: the government is prisoner of a self-
-inflicted “exchange trap”.

JEL Clasisifcation: F41; G28; E12.