Plano Real
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ThePlano Real( "RealPlan ",[1]inEnglish) was a set of measures taken to stabilize theBrazilian economyin 1994, during the presidency ofItamar Franco.Its architects were led by theMinister of Financeand succeeding presidentFernando Henrique Cardoso.The Plano Real was based on an analysis of the root causes ofhyperinflationin theNew Republicof Brazil, that concluded that there was both an issue offiscal policyand severe, widespreadinertial inflation.The Plano Real intended to stabilize the domesticcurrencyinnominal termsafter astring of failed plansto controlinflation.
Background[edit]
According to economists, one of the causes of inflation in Brazil was theinertial inflationphenomenon. 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 Realthen created a non-monetary currency, theUnidade 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[edit]
The Plano Real intended to stabilize the domesticcurrencyinnominal termsafter astring of failed plansto controlinflation.It created theUnidade Real de Valor(Real Unit of Value), which served as a key step to the implementation of the new (and still current) currency, thereal.At first, most academics tended not to believe that the Plan could succeed.Stephen Kanitzwas the first public intellectual to predict the future success of the Real Plan.[citation needed]
A new currency called thereal(pluralreais) was introduced on 1 July 1994, as part of a broader plan to stabilize the Brazilian economy, replacing the short-livedcruzeiro realin the process. Then, a series of contractingfiscalandmonetary policieswas enacted, restricting the government expenses and raising interest rates. By doing so, the country was able to keep inflation under control for several years. In addition, high interest rates attracted enough foreign capital to finance the current account deficit and increased the country's international reserves. The government put a strong focus on the management of thebalance of payments,at first by setting the real at a very highexchange raterelative to theU.S. dollar,and later (in late 1998) by a sharp increase on domesticinterest ratesto maintain a positive influx of foreign capitals to local currencybond markets,financing Brazilian expenditures.
Result[edit]
The real initially appreciated (gained value) against the U.S. dollar as a result of largecapitalinflows 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 presidentArminio 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[edit]
References[edit]
- ^The wordrealin Portuguese could be translated either torealorroyalin 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[edit]
- The 2010-10-04 episode of NPR's Planet Moneydevoted to the Plano Real, describing it in simple terms