Abstract
This paper discusses the role of fiscal and monetary policies in an LDC with a major commodity export that is facing a depression abroad. The analysis is conducted in the context of a general equilibrium model which comprises a commodity-producing sector and an import-competing sector. Idle capacity and labor unemployment areassumed. Flexibility of the real exchange rate and industrial output responses to demand are the main adjustment mechanisms. The key to understanding the behavior of the Brazilian economy in 1930s is the government coffee-support policy which held the income of the export sector at a high level and hence enabled the manufacturing sector to expand. The fact that industrial output expanded in the face of both real depreciation and appreciation points to the importance of expenditure effects relative to price effects during the 1930s.
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