Abstract
s: This paper has three main objectives: first, to support the view that, despite recognizing that the policy space for assuring both the internal and external stability is sharply reduced when the “balance of payments dominance” prevails in some open emerging economies like Brazil, even when it is possible to overcome the so-called “impossible trinity”, that is, the supposed impossibility of simultaneously guaranteeing the three goals of economic policy in a country with a floating exchange rate regime: price stability, exchange rate stability and (at least, relatively) free capital mobility; second, to argue that not only the pursuance of the exchange rate stability, but also the targeting of the so-called long-term “optimal” real exchange rate an original concept that was introduced by two other academic colleagues and I (see Nassif, Feijo and Araujo, 2011) and will be defined ahead should be in the current agenda of the Brazilian policy-makers; and third, the main economic policy implication we can draw from the previous Sections are that, instead of a narrow macroeconomic policy as that which prevailed throughout the 2000s in Brazil, policy-makers should urgently mirror most well succeeded Asian countries and adopt a mix of short and long-term economic policy instruments in order to both avoid the “balance of payments dominance” and assure a sustainable long-term economic growth .
Highlights
There have been more than twelve years since high inflation was elim‐ inated and a floating exchange rate regime was introduced in Brazil in 1999, at least two aspects have clearly marked the Brazilian economy in the 1999-2011 period: first, business cycles were characterised by stop and go behaviour, with annual aver‐ age growth rates of real GDP (3.4%) much lower than the emerging and developing countries (6.0%) and very close to the global economy (3.7% — see Figure 1); and second, there was a cyclical and persistent tendency of the Brazilian currency to ap‐ preciate in real terms (Nassif, Feijó and Araújo, 2011)
As well discussed by many studies1, a significant part of this poor performance can be credited, on the one hand, to the Brazilian growth model based on external saving through which growing and unsustainable current account deficits are gen‐ erally reversed by overshooting of the nominal and real exchange rates and sudden stops
On the other hand, to a very narrow and orthodox short-term macro‐ economic policy which has over-pursued the goals of price stability and monetary independence compared with other important economic and social goals, such as a sustainable long-term growth; structural change directed to both diver‐ sify exports to sectors of higher technological intensity and prevent the economy
Summary
There have been more than twelve years since high inflation was elim‐ inated and a floating exchange rate regime was introduced in Brazil in 1999, at least two aspects have clearly marked the Brazilian economy in the 1999-2011 period: first, business cycles were characterised by stop and go behaviour, with annual aver‐ age growth rates of real GDP (3.4%) much lower than the emerging and developing countries (6.0%) and very close to the global economy (3.7% — see Figure 1); and second, there was a cyclical and persistent tendency of the Brazilian currency to ap‐ preciate in real terms (Nassif, Feijó and Araújo, 2011). As well discussed by many studies, a significant part of this poor performance can be credited, on the one hand, to the Brazilian growth model based on external saving through which growing and unsustainable current account deficits are gen‐ erally reversed by overshooting of the nominal and real exchange rates and sudden stops. The opinions expressed in this study are those of the author and do not reflect the views of the Brazilian government and the BNDES. This paper is a modified version of the powerpoint presentation prepared for the Second Workshop on “Financial Stability and Financial Governance in Brazil — Assessing the Landscape and Drawing Policy Implications”, Getulio Vargas Foundation (Fundação Getulio Vargas — SP), São Paulo, March 24 and 25, 2011.
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