Abstract
One of the main conclusions of this commentary is that the Real plan – the stabilisation programme introduced in Brazil in July 1994 which was quite successful in bringing inflation down from the extremely high levels that prevailed before that period – did not attack the main cause of the country's inflation, that is, the large financial imbalance in the public sector. Instead, inflation was reduced in an indirect way, by freezing government-controlled prices and wages. In mid-1998, the programme still relies on extremely high interest rates and a tight control of the exchange rate. The main weakness of the plan is that, with the overvalued currency, trade deficits are accumulating. Also, very high interest rates have brought the economy to a halt and caused a sharp increase in the government debt.
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