Beyond Inflation Targeting
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Beyond Inflation Targeting

Assessing the Impacts and Policy Alternatives

Edited by Gerald A. Epstein and A. Erinc Yeldan

This book, written by an international team of economists, develops concrete, country specific alternatives to inflation targeting, the dominant policy framework of central bank policy that focuses on keeping inflation in the low single digits to the virtual exclusion of other key goals such as employment creation, poverty reduction and sustainable development.
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Chapter 7: Inflation Targeting in Brazil: 1999–2006

Nelson H. Barbosa-Filho


Nelson H. Barbosa-Filho Brazil adopted inflation targeting after a brief period of exchange rate targeting that ended up in a major currency crisis. More specifically, in 1994–98 the Brazilian government used high domestic interest rates and privatization to attract foreign capital and sustain an appreciated exchange rate peg. The main objective of the Brazilian economic policy at that time was to reduce inflation and the main side effect of exchange rate appreciation was a substantial increase in the country’s current account deficit and net public debt. Similar to what happened in Mexico and Argentina during the 1990s, the Brazilian macroeconomic stabilization strategy was heavily dependent on the continuous inflow of foreign capital and, as a result, the international financial position of Brazil became increasingly fragile after the contagion effects from the East Asian currency crises of 1997 and the Russian currency crisis of 1998. In fact, by the end of 1998 Brazil’s current account deficit reached 4.5 percent of GDP and the low stock of foreign reserves of the Brazilian Central Bank (BCB) did not allow a defense of the Brazilian currency, the real, in case another speculative attack hit the country. The inevitable currency crisis came in the beginning of 1999 and resulted in a ‘maxi-devaluation’ of the real. In numbers, the Brazilian real/US dollar exchange rate rose 57 percent in just two months, that is, from 1.21 in December 1998 to 1.90 in February 1999. After that the exchange rate dropped a little and then remained around...

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