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Plano Real

Page history last edited by PBworks 15 years, 4 months ago

 

 

Background:

 

The Plano Real (Portuguese, Real Plan) was a set of measures taken to stabilize the Brazilian economy in early 1994, under the direction of Fernando Henrique Cardoso as the Minister of Finance, during the presidency of Itamar Franco. [1]

 

Its architects include, among many others, Pérsio Arida, André Lara Resende, Edmar Bacha, Gustavo Franco, Pedro Malan, Winston Fritsch and Francisco Pinto. [2]

 

According to economic academics, one of the causes of inflation in Brazil was the inertial inflation phenomenon. Prices were adjusted on a daily basis according to changes in price indexes and to the exchange rate of the local currency to the U.S. dollar. Plano Real then created a non-monetary currency, the Unidade Real de Valor ("URV") which value was set to approximately 1 US dollar. All prices were quoted in these two currencies, cruzeiro real and URV, but payments had to be made exclusively in cruzeiros reais. Prices quoted in URV did not change over time, while their equivalent in cruzeiros reais increased nominally every day.

 

The Plano Real based its actions on an analysis of the root causes of inflation in the post-military dictatorship Brazil that concluded that there was both an issue of fiscal policy and severe, widespread inertial inflation.

 

The Plano Real or Real Plan intended to stabilize the domestic currency in nominal terms after a string of failed plans to control inflation. It created the Unidade Real de Valor (Real Unit of Value), which served as a key step to the implementation of the current currency, the real.

 

The Plano Real introduced a new currency called the real (plural reais) on 1 July 1994, as part of a broader plan to stabilize the Brazilian economy, the short-lived cruzeiro real was substituted in the process.

 

The real initially appreciated (gained value) against the U.S. dollar as a result of the large amount of capital inflows in late 1994 and 1995. It then began a gradual depreciation process, culminating in the 1999 January Brazilian currency crisis, when the Real suffered a maxi-devaluation, and fluctuated wildly. Following this period (1994-1999) of a quasi-fixed exchange rate, an inflation-targeting policy was instituted by new central bank president Arminio Fraga, which effectively meant that the fixed-exchange period was over. However, the currency was never truly "free," being more accurately described as a managed or "dirty" float, with frequent central bank interventions to manipulate its dollar price.

 

It also was characterized by a strong focus on the management of the balance of payments, at first by setting the real at a very high value relative to the U.S. dollar and later (late 1998) by a sharp increase on domestic interest rates to maintain a positive influx of foreign capitals to local currency bond markets, financing Brazilian expenditures.

The Plano Real partly incorporated policies and ideas from the Washington Consensus.

 

 

 

 

Since then:

 

Hurt in 1997:  mid-1997 stabilization was not fully consolidated and the Asian crisis hit Brazil extremely hard.  The Real Plan was an ‘exchange based stabilization’, with a crawling band peg. The government used $22 billion in international reserves to avoid massive depreciation in the domestic currency. However, when the Russian crisis hit Brazil by mid 1998, the country had no other choice but to go to the IMF.

 

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