Questions 1. How does Brazil hope to control its currentaccount deficit through a tight monetary policy? What alternatives are available to control
1. How does Brazil hope to control its currentaccount
deficit through a tight monetary
policy? What alternatives are available to
control Brazil’s current-account deficit?
2. How will Brazil’s tight money policy affect its
fiscal deficit? How will it affect Brazil’s real
(inflation-adjusted) interest rates, both shortterm
and long-term rates?
3. Why have Brazil’s interest rates generally fallen
in recent years?
4. How would reform and privatization of
the social security system improve Brazil’s
savings rate? What would be the likely consequences
of this improvement for Brazil’s
current-account balance and the real’s value?
5. What are the costs and benefits of using currency
controls to defend the real?
6. Why might speculators view the real as
being overvalued? Based on the data in the
case, what is your best estimate as to the
real’s degree of overvaluation?
7. What are the tradeoffs that President
Cardoso must consider in deciding whether
to accelerate the real’s depreciation?
8. Could Brazil have avoided the recessionary
impacts of its monetary policy if it had
devalued the real instead?
9. What would a Brazilian devaluation do to
the currencies and economies of Argentina
and Chile, its neighbors and largest trading
10. What is the link between Brazil’s budget
deficits and its historical hyperinflation?
11. What mix of fiscal and monetary policy
would you recommend to President
Cardoso? Should he devalue or defend the
Exhibit I 2.5 Brazilian Interest Rates
Long-term interest rate
Source: Central Bank of Brazil Bulletin, April 1998.