External disequilibrium and the exchange rate

Abstract

This paper has two parts. The first one estimates the rate of real devaluation necessary to bring the current account deficit in Brazil from 4.5% of GDP to 2.5% of GDP. To accomplish this reduction without affecting total output, a devaluation between 12.3% and 18.63% would be required. The same reduction in the current account deficit without changes in the exchange rate would demand a decrease in total output of between 11.5% and 14.88%. To achieve at the same time full employment and the reduction in the current account deficit a devaluation of 28.56% would be needed. The second part evaluates critically the exchange rate policy followed after 13.01.99 and try to assess the consequences for the equilibrium exchange rate of considering five possible international scenarios. The devaluation would vary between 23.36% and 99.56% for the most favorable and least favorable scenarios, respectively. The paper finishes with a comparative analysis of alternative exchange rate regimes, from free-floating, dirty-floating, the currency board and full dollarization.