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The Real Plan and the Exchange Rate
Gustavo H. B. Franco Essays in International Finance No. 217
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| The Real Plan put an end to Brazilian hyperinflation by combining an innovative monetary-reform scheme with monetary and exchange-rate policies meant to address fundamental imbalances at the root of Brazil’s impressive record of inflation. Even though it has not been considered an exchange-rate-based program, and despite its very good results, the Real Plan has raised considerable controversy. Much of this controversy has been about exchange-rate management, which is seen by many to be the key reason both for the success of the plan and for the economy's fragility with respect to external shocks. The essay clarifies some issues of measurement that emerged in the context of the monetary reform initiating the Real Plan and that produced misreadings of the early results of the plan. It discusses relative-price changes inherent to stabilization, the extent of appreciation under the Real Plan, and whether equilibrium exchange rates should change as the economy moves beyond hyperinflation. It considers the choice of the exchange-rate regime, keeping in mind the complex agenda of stabilization and reforms to be met by the Real Plan; addresses specific issues raised by the Asian crisis; discusses policy developments in the aftermath of the 1999 devaluation; and considers the long-run implications of the events and the choices made during the 1990s. |
