From Inertia to Megainflation: Brazil in the 1980s, Issue 3585
This paper discusses the acceleration of inflation in Brazil. In the early 1980s, the Brazilian inflation rate increased in good measure because of the balance of payments crisis and because of large depreciations of the cruzeiro. The Cruzado Plan failed to stop inflation because of an extremely loose monetary policy coupled with a lack of fiscal austerity. Repeated price controls have increased the variability of inflation. More recently, the decline in tax collections and the growth of interest payments on a ballooning domestic debt have built up a massive fiscal problem. Flight from money has further aggravated Brazilian inflation. Two steps are used in explaining the Brazilian inflationary process: the analysis of price freezes in the context of sustained fiscal imbalance and the research on the consequences of different fiscal deficit financing forms. The paths of inflation and real cash balances in response to different shocks are simulated. The focus is on the effects of controls that impose a temporary reduction of the inflation rate under different choices for monetary and fiscal policies. A model of an open economy where agents can hold money, domestic bonds and inventories of goods clarifies the linkage between Brazil's growing inability to finance the public sector deficit externally after 1982 and the acceleration of inflation.
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acceleration of inflation average balance of payments Banco Central Brazilian inflation rate budget constraint budget deficit corrected cobweb model Coefficient of Variation Conjuntura Economica Consolidated Debt corrected for inflation debt service decline devaluation dispersion of relative domestic bonds domestic debt Eliana Cardoso employment real interest equation exports external borrowing external credit rationing external debt external finance fiscal consolidation fiscal imbalance full employment real growth rate IMF Staff Papers indexation INERTIA TO MEGAINFLATION Inertial Inflation inflation in Brazil inflation rate increased Inflation Stabilization interest payments loose controls low inflation equilibrium monetary base monetary correction monetary policy money growth nominal interest rate percent per month PLACE FIGURE price controls price freeze PSBR Public Sector Borrowing ratio real cash balances real depreciation real income real interest rate representing the steady revenues schedule representing Sector Borrowing Requirements service the external shows Statistical Appendix steady state inflation Table 2.A trade surpluses wages