Plano Real
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The Plano Real ("
Background
According to economists, one of the causes of inflation in Brazil was the
Solution
The Plano Real intended to stabilize the domestic
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
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
- ^ 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
- The 2010-10-04 episode of NPR's Planet Money devoted to the Plano Real, describing it in simple terms