Vol. 22 No. 3 (2002): Jul-Sep / 2002

Vol. 22 No. 3 (2002)

Jul-Sep / 2002
Published July 1, 2002


Real Plan and foreign exchange anchor
Maria Luiza Falcão Silva
Brazilian Journal of Political Economy

Recently, a number of Latin American countries with high inflation and various kinds of imbalances have experienced disinflation stabilisation programmes. Brasil implemented in July 1994 the Real Plan — an exchange-rate-based stabilisation experiment. This paper revisits this experience examining the main reasons for the collapse of the exchangerate regime, in January 1999, from alternative theoretical points of view. What emerges from the paper is the conclusion that most of the “new” arguments presented to explain the Brazilian currency crisis are arguments used in the past by heterodox theorists.

JEL Classification: E31; N16.

Inflation Targeting: Proposals for a Permanent Regime
Fabio Giambiagi, José Carlos Carvalho
Brazilian Journal of Political Economy

In 1999 the inflation targeting regime was introduced in Brazil in an environment plenty of uncertainties and relatively high inflation rates. As a consequence, the set of rules that to this day govern the Brazilian regime still lack a strong institutional support. This paper makes some proposals for a permanent inflation targeting regime. In doing so, we discuss how can a greater institutional commitment be achieved with the inflation targeting setup. We also discuss issues on what the permanent inflation target level should be and also how much deviation from the target should be tolerated. Based on these issues, we suggest a set of rules to be adopted in Brazil.

JEL Classification: E52; E58.

The Theory of Monetary Policy Credibility
Helder Ferreira de Mendonça
Brazilian Journal of Political Economy

This paper analyzes the main arguments concerning credibility theory for monetary authority from the mainstream literature. In this sense, the origin of the debate entitled rules versus discretion is examined and the advances in literature from the central bank independence proposal. The findings denote that the problem of the inflationary bias for conduction of monetary policy is a result of a set of ad hoc hypotheses used by the literature. Thus, the developments in the literature concerning the credibility from inflationary bias represent a particular case for monetary theory.

JEL Classification: E52; E58.

Credibility and the design of regulatory agencies in Brazil
Bernardo Mueller, Carlos Pereira
Brazilian Journal of Political Economy

In this paper we model the process of regulatory agency design, focusing on the role of credibility. The government is constrained in the sense that it must create regulatory institutions that allow it to commit to not administratively expropriate investors. The model explains both the preference of the agency head chosen by the government as well as the optimal level of statutory control. We argue that in Brazil this trade-off between credibility and control of the agencies is key to understanding the specific regulatory institutions that have been chosen. Comparative static results are derived to examine how changes in some key variables affect the design of the agencies, providing us with a set of hypotheses for comparing the design of five different agencies created to regulate industries with very different characteristics. Although these agencies were initially created under very similar designs, they are expected to evolve in ways that accord with our theory.

JEL Classification: L5; K2; D82.

The Political Economy of Gender: Determinants of the Division of Labor
Anita Kon
Brazilian Journal of Political Economy

This article examines some recent discussions about labor division between genders that take place in the field of Political economy. It analyses theoretical approaches that stress the need of a less rigid theory, in its disciplinary boundaries, and reject the concept of Economy as an ahistorical, disembodied entity. It discusses the gender occupational distribution, beginning with a historical point of view about the development of this phenomenon, and observing the impacts of the demand and offer determinants of the labor market, the effects of economic restructuring and causes of wage differences.

JEL Classification: J01; J7; J16.

Endogenous Risk Premium, Inflation Targets and Flexible Exchange Rate: Dynamic Implications of the Bresser-Nakano Hypothesis for a Small Open Economy
José Luís Oreiro
Brazilian Journal of Political Economy

The objective of this article is to analyze the implications of Bresser-Nakano hypothesis, that risk-premium is positive related to domestic rate of interest, over time paths of nominal interest rate and nominal exchange rate in a small open economy whose regime of economic policy is characterized by flexible exchange rate, inflation targeting and short run capital mobility. In the theoretical framework developed in the article, we are able to shown that, in the case of a strong positive feedback of nominal interest rate over risk-premium, (i) there are multiple time paths of nominal interest rate and nominal exchange rate; (ii) all such paths are compatible with some degree of price stability and (iii) some of these paths, however, are related to an increase in current account deficit and/or a continuous increase in fiscal deficit. The logical conclusion of these results is that the achievement of current account and fiscal equilibrium can only be obtained by a change in the regime of economic policy. 

JEL Classification: E4; E6; F32.

Multiple Balances
Persio Arida
Brazilian Journal of Political Economy

The note is the second of a series of four notes written for students on current policy debates. It focuses on a simple open economy model in which there is a subjective default probability on domestic debt. Under certain conditions there is more than one pair interest/exchange consistent with a given inflation target. Dynamics is explored under a simple behavior rule according to which Central Bank increases interest if inflation is above target. The effect of credible fiscal tightening, external shocks in interest rates or sovereig 
debt and expected changes in the convertibility regime are discussed.

JEL Classification: E43.

Currency Fluctuation and Interest Rate in Brazil
João Sicsú
Brazilian Journal of Political Economy

This short article shows that since 1999 the interest rate has been correlated to exchange rate volatility in Brazil. Therefore, it would be one of the reasons for not reducing the interest rate in Brazil.

JEL Classification: E52; E58; F31.

Risco-Brasil: The Lula Effect and the Central Bank Effects
Joaquim Elói Cirne de Toledo
Brazilian Journal of Political Economy

This short paper discusses the behavior of Brazil’s sovereign risk spread, since the adoption of a floating exchange rate regime in the beginning of 1999. The data presented seem to support the hypothesis of perverse effects of domestic monetary policy on countryrisk. On the other hand, fears of a future debt default — sparked by volatile presidential election polls — do not seem to explain a significant part of the risk spread, until very recently. The author is fully aware of the existence of a rich and fast-growing literature on country-risk. This paper is not an attempt to add new pieces of theory or rigorous analytical evidence to that literature; its sole aim is to make a small contribution to the debate, by pointing at some usually neglected factors that may explain Brazil’s sovereign risk spread. 

JEL Classification: E43.


A Strategy of Development with Stability
Luiz Carlos Bresser-Pereira, Yoshiaki Nakano
Brazilian Journal of Political Economy

To resume economic growth after 20 years of quasi-stagnation depends on a growth strategy that combines macroeconomic stability with growth-oriented policies. The Real Plan stabilized prices, but, as a trade-off, the interest rate skyrocketed while the exchange rate remains artificially appreciated. The main challenge is to reduce the basic interest rate, which is considerably higher than the ones in countries with similar country risk classification. There are several reasons for that including little concern of the monetary authorities with reducing the interest rate, and the inverse relation between the interest rate and the default risk: the high interest rate defined by the Central Bank influences upward the Brazil risk.

JEL Classification: E4; E5; O54.