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Markets, Politics, and Learning: Explaining Monetary Policy Innovations in Brazil

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Abstract

An increasing number of developing and emerging economies have adopted an inflation targeting framework for monetary policy during the last two decades. This article investigates the politics of inflation targeting by focusing on the case of Brazil. I argue that the decision to implement an inflation targeting system in 1999 did not only reflect the concerns of political leaders with maintaining electoral support and external credibility. In addition, the choice of this new policy approach was informed by a shift in the technical consensus among Brazilian economists about the most effective way to tame inflationary pressures in a context of high capital mobility. The shift to inflation targeting thus reflected a process of social learning among technical elites, facilitated not only by the failure of the previous policy but also by the successful experience of other inflation targeting countries. Moreover, the evidence presented here suggests that, as the first country to adopt inflation targets in the context of an IMF-supported program, Brazil became a test case and a natural experiment for the redefinition of IMF conditionality and surveillance mechanisms. The paper thus sheds light on a process of reciprocal learning, whereby the IMF not only contributed to collective learning but also learned from the Brazilian case, subsequently becoming an active promoter of inflation targeting among developing countries.

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Notes

  1. Nominal anchors are constraints on the value of domestic money, which are used to tie down the price level to a specific value at a given time, thus “anchoring” inflation expectations. Nominal anchors can be quantity constraints (e.g. a limit on the amount of money in circulation in an economy) or a price constraint (e.g. fixing the value of a domestic money in terms of another good or asset, such as gold or a foreign currency). According to Mishkin (1999, 580), nominal anchors can be thought of as “a constraint on discretionary policy that helps weaken the time inconsistency problem, so that in the long run, price stability is more likely to be achieved.” See also Cotarelli and Giannini (1997).

  2. See also Khamfula (1998).

  3. For an excellent overview of Brazil’s exchange rate and monetary policy since the end of the Second World War, see Coes (2009).

  4. See, for example, Sola (1991) and Smith (1989).

  5. On the Real Plan and its economic consequences, see Amann and Baer (2003); Cardoso (2000).

  6. Under this system, the new bands were adjusted every 3 days, based on the behavior of the exchange rate.

  7. Inflation targeting was first adopted in the early 1990s by industrial countries like New Zealand and Canada, which sought to achieve price stability while maintaining flexible exchange rates. Other countries, such as the United Kingdom, Sweden and Finland, shifted to inflation targeting after unfavorable experiences using fixed exchange rate as their policy anchors. Toward the end of the 1990s, this new monetary policy framework spread to emerging markets and developing countries. See, for example, IMF (2006).

  8. The SELIC refers to the Special System of Clearance and Custody, a data processing system setup to register all transactions involving public securities on the open market (IMF 1999a, b).

  9. See presentation by Peter Garber, from Deutsche Bank, during the Fourth Country Meeting of the NBER Project on Exchange Rate Crises in Emerging Market Countries, Cambridge, MA, April 14–15, 2000.

  10. O Estado de São Paulo, Feb. 14, 1999.

  11. Interview with Christian Lohbauer, Head of the International Negotiations, FIESP, November 2002.

  12. O Estado de São Paulo, 2 Sept. 1998.

  13. Interview with Júlio Sérgio Gomes de Almeida, Executive Director, IEDI, November 2002.

  14. The IEDI was created in 1989 by a group of prominent industrial leaders, who sought to overcome collective action problems and thus more effectively promote a developmental agenda. See Kingstone (1998).

  15. Interviews with José Coelho Fernandes, Executive Director of CNI, and with Eugênio Gouveia Vieira, President of FIRJAN, November 2002.

  16. “Empresários do Conselho Estratégico da FIESP falam de PIB, Juros e Câmbio,” Economia & Negócios, 10 Sept. 2008.

  17. The evolution of voters’ intentions in the run up to the 1994 elections shows that, while Lula led comfortably in the polls during the first half of the year, intentions shifted decisively after the introduction of the Real Plan in July 1994. See Spanakos and Renno (2006).

  18. See, for example, “La Política Monetaria, Más a Mano del Presidente,” Clarín, 19 August, 2005.

  19. “Gustavo Franco contra tudo,” Isto é Dinheiro, June 23, 2004. In his words: “The idea in December 1998 was [….] once speculative attacks were completely defeated, to move forward more rapidly toward a floating regime.”

  20. Franco, quoted in “Gustavo Franco contra tudo,” Isto é Dinheiro, June 23, 2004, p. 4.

  21. Lopes had also participated in the design and implementation of the Cruzado Plan. See Smith (1989).

  22. These sources included, among others, King (1997); Massad (1998); Svensson (1998), and Taylor (1998).

  23. Interview with Marcos Caramuru de Paiva, Finance Ministry, November 2002.

  24. See, for example, Bléjer et al. (2001), IMF (2006), and Otker–Robe and Vávra. (2007).

  25. For example, a quick search of the IMF publications database using the key words “inflation targeting” shows that, while there were only seven research documents on this topic published before 1999, a total of forty papers on inflation targeting were published by IMF staff between 1999 and 2009.

  26. Countries to which specific technical assistance on inflation targeting has been provided include: Albania, Armenia, Belarus, Colombia, Costa Rica, Czech Republic, Guatemala, Indonesia, Kazakhstan, Poland, Romania, Slovak Republic, Turkey and Ukraine.

  27. See also Saad-Filho and Mollo (2006).

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  1. Department of International Studies, University of Miami, Coral Gables, FL, 33124, USA

    Laura Gómez-Mera

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Gómez-Mera, L. Markets, Politics, and Learning: Explaining Monetary Policy Innovations in Brazil. St Comp Int Dev 46, 243–269 (2011). https://doi.org/10.1007/s12116-011-9084-1

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