The exchange rate policy of the Real Plan

Abstract

The main objective of this work is to analyze the arguments in favor and against the exchange rate policy followed in Brazil since 1994 and to question the suitability of this policy to the Brazilian case. The arguments based upon either productivity gains, public deficit or calculations of PPP are not sufficient to justify the continue use of the fixed exchange rate regime. Theoretically the best policy to attain the internal and external balance is to devalue the local currency and to the increase interest rate. This procedure does not mean a free floating exchange rate regime.