University of Cambridge

Brazil Exchange Rates Regime

Introduction:

This paper focuses on the exchange rate regime of Brazil during the 1960 to 1975 period and why the policy makers declined to change their exchange rate regime, in 1948 brazil introduced par value for the Cruzeiro, however in 1967 the crawling peg exchange rate regime was introduced, the crawling peg system was based on frequent and small adjustment in the exchange rate which was to signify the changes in inflation and prices in Brazil, this exchange rate regime led to long term stability in the Brazilian currency the real.

In 1971 the US floated its currency and as a result the devaluation of the dollar would affect the exchange of the Brazilian currency with other major currencies, during this period the Brazilian policy makers believed that the balance of payment was best managed by import control and export incentives, trade flow was in this period controlled by tariffs, subsidies and the direct control on trade. This period was also characterised by import substitution strategy that was aimed at improving balance of trade, however the policy maker later realised that the adjustments would be even more effectively managed using the exchange rate system.

During the period Brazil exports become more competitive and there was slow inflation in the economy and it seized to be termed as a developing country, there are various reasons that led to the resistant of the policy makers to change the exchange rate regime.

Exchange rate regimes:

There are three types of exchange regimes and they include fixed exchange rate, float exchange rate and pegged exchange rate regime, the fixed exchange rate regime is that which the currency of a country has direct convertibility to another currency. The float rates is a regime that involves letting the supply and demand in the market to determine exchange rate but the economy can intervene in order to avoid depreciation, finally the pegged float is a regime where the currency is pegged to some value which is periodically adjusted or fixed.

Brazil exchange rate regime:

In 1968 policy makers introduced a crawling peg system which was based on frequent and small adjustment in the exchange rate, the frequent adjustments were made to signify the changes in inflation and prices in Brazil, this exchange rate regime led to long term stability in the Brazilian currency the real and for this reason the policy makers did not find any reason to change the exchange rate regime at the time.

The pegged exchange system reduced uncertainty in exchange rates of the currency, this is because the individuals would have the knowledge that the currency would not devalue or revalue by a large margin and for this reason future production was made easier regarding production.

This system that Brazil adopted also reduced speculative attacks associated with other forms of exchange systems, however the economy could not get speculative gains from this type of exchange rate system. During this period also Brazil experienced slow inflation and prices become more competitive in the international market, this system also allowed the country to improve its balance of payment and therefore policy makers did not have the need to change the exchange rate regime due to the high growth experienced.

During this period the policy makers believed that the balance of trade was best managed through trade policies such as tariffs, subsidies and import control, for this reason therefore there was increased industrial expansion to undertake import substitution and this ed to spectacular growth in brazil, Brazil exports become more competitive in the international due to slow inflation in the economy and Brazil seized to be termed as a developing country. Due to this strategy therefore the policy makers did not concentrate much on the significance of the exchange regime to manage balance of trade. However the policy maker later realised that the adjustments would be even more effectively managed using the exchange rate system.

Before 1971 the US had not floated its currency and because Brazil exchange rates were based on the dollar there was reduced shocks and inflation that would be caused by external forces and shocks, however the introduction of the float regime in the US led to the devaluation of the Brazilian currency and this eroded competitive prices in Brazilian exports, as a result this devaluation made Brazil to realise the importance of the exchange rate system in the economy.

As Brazil competitiveness declined in the international market the policy makers changed their exchange rate regime into a floating rate regime but the problem persisted where the country was forced to finance its current account deficits through debts, for this reason therefore it is clear that the policy makers also declined to change their exchange rate regime due to the US failing to adopt a float regime until 1971, after the floating of the dollar which the Brazilian economy had pegged its currency in 1971 the Brazilian currency experienced devaluation and for this reason the current account deficits increased and also this eroded competitive prices in the international market.

Conclusion:

From the above discussion it is clear that the Brazilian policy makers declined to change their exchange rate regime, some of the reason why they failed to change the regime is because they believed that only trade policies were important in determining balance of trade, for this reason the policy makers concentrated on trade policies such as tariffs, subsidies and direct trade control, further spectacular growth was experienced in this period where import substitution strategy was aimed at production of consumer goods, basic inputs and capital goods and all this were aimed at improving balance of payment.

Also due to the various advantages that are associated with the pegged system the country did not change its regime this system reduced uncertainty in exchange rates of the currency and also reduced speculative attacks in the economy, therefore the policy makers did not find any reason to change its regime.

In 1976 when there was a deviation in the Brazilian currency the country had no option but to put more emphasis on the importance of the exchange rate regime in improving the balance of payment, this led to the economy changing its regime into a floating currency regime following the devaluation of the currency as the US dollar was floated in 1971.

References:

Boris Fausto (1999) Concise History of Brazil, Cambridge university press, Cambridge

Celso Furtado (1994) Economic Growth of Brazil, University of California Press, California

Charles Wagley (1993) Introduction to Brazil, Columbia University Press, New York

Costa Cruz (1964) a History of Ideas in Brazil, University of California Press, California

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