Chapter 10: Inflation Targeting and Exchange Rate: Notes on Brazil’s Experience
Paulo Vieira da Cunha, Daniela Silva Pires and Wenersamy Ramos de Alcântara 10.1 INTRODUCTION In 2004, the Central Bank of Brazil (Banco Central do Brasil, henceforth BCB) introduced a program of sterilized interventions in the foreign exchange market, in effect to July 2008. Reserves increased by US$864 million in 2005, US$32.04 billion in 2006, US$94.5 billion in 2007, and US$15.19 billion by July 2008.1 The primary aim of the program is to accumulate precautionary reserves to buttress the credibility and increase the resilience of the macroeconomic regime. The secondary aim is to reduce exchange rate volatility by acting in anticipation of what the BCB knows to be relatively large and atypical market performance. The policy of sterilized interventions does not aim to influence the level of the exchange rate. Nevertheless, the build-up of reserves – and the overall steady decrease in net external liabilities of the public sector – reduces the perception of country risk. Thus, indirectly, given the market’s positive reaction to strengthened fundamentals, an outcome of the policy has been an increase in foreign investment, notably foreign direct investment (FDI), and greater capital inflows. The BCB’s stated goals and practice in its interventions differ markedly from those of other recent intervention experiences, for example China and even Colombia, where there has been an explicit aim to influence the level of the exchange rate. The contrast with Colombia, as examined by Kamil (2008), is illustrative. Undoubtedly, in Brazil as well, the level and trend of the...
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