Plano Real

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(Redirected from
Real Plan
)

Real Plan, which brought stability to the Brazilian economy after years of hyperinflation
.

The Plano Real ("

.

Background

According to economists, one of the causes of inflation in Brazil was the

Unidade Real de Valor
("URV"), whose 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 reals increased nominally every day.

Solution

The Plano Real intended to stabilize the domestic

Unidade Real de Valor (Real Unit of Value), which served as a key step to the implementation of the new (and still current) currency, the real. At first, most academics tended not to believe that the Plan could succeed. Stephen Kanitz was the first public intellectual to predict the future success of the Real Plan.[citation needed
]

A new currency called the real (plural reais) was introduced on 1 July 1994, as part of a broader plan to stabilize the Brazilian economy, replacing the short-lived

interest rates to maintain a positive influx of foreign capitals to local currency bond markets
, financing Brazilian expenditures.

Result

The real initially appreciated (gained value) against the U.S. dollar as a result of large capital inflows in late 1994 and 1995. It then began a gradual depreciation process, culminating in the 1999 January 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.

The currency's appreciation was crucial to keep inflation under control. Mainly, it assured the supply of cheap imported products to meet the domestic demand and forced domestic producers to sell at lower prices in order to maintain their market shares. This was especially important in the period immediately following the adoption of the new currency, when the sudden drop in inflation caused a surge in demand. The increased imports, therefore, were essential to avoid demand-side inflationary pressures that would undermine the stabilization plan.

See also

References

  1. ^ The word real in Portuguese could be translated either to real or royal in English. The name of the plan comes from the name of the currency which was chosen to give the idea of a stable and credible purchasing power.

External links