Critical Assessments of The General Theory
Edited by L. Randall Wray and Matthew Forstater
Chapter 11: Inflation Targeting in Brazil: A Keynesian Approach
11. Inﬂation targeting in Brazil: a Keynesian approach Luiz Carlos Bresser-Pereira and Cleomar Gomes da Silva* INTRODUCTION Since the beginning of 1999, when the ﬂotation of the real implied the abandonment of the exchange rate anchor, monetary authorities have adopted inﬂation targeting (IT) as the new nominal anchor, as if Brazil could not dispense with an anchor. Usually seen as a successful policy in so far as the inﬂation rate has been kept reasonably under control, IT policy has shown problems related to the achievement of its objectives and, principally, to the high ﬁscal and development costs involved. These problems are due to two main reasons. On one side, the Taylor rule – the simple model relating the target with the interest rate given the product gap – can only be accepted if it is combined with the consideration of other variables such as exchange rate and employment rate. The argument that the central bank can only have one target because monetary authorities have only one instrument is neither reasonable nor realistic. In practice, central banks do not work in this way. The second one is related to a grave inconsistency dilemma. An IT policy is designed to ‘manage’ monetary policy, not to ‘change’ the ‘monetary policy regime’: it orients the policy maker to deﬁne the interest rate within a limited range, not to face an interest/exchange rate trap, characterized by an extremely high interest rate and an overvalued real prevailing in Brazil for many years.1 An IT...
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