The exchange rate policy under discussion

ABSTRACT

Indicators for Brazil’s real exchange rate are calculated using different definitions and focusing on what happened to such indices during the Cruzado plan. The real effective exchange rate shows little appreciation in 1986 although the Cruzado/Dollar rate did appreciate. The result is troubling in the light of a 25% decrease in Brazil’s trade surplus in 1986. The paper argues that the net trade balance is explained by three variables: the real effective exchange rate, domestic real income and real income in the rest of the world. An econometric exercise shows strong income effects, effects that are ignored by the policy of minidevaluations. The paper then looks at the suggestion of a dual exchange rate regime for Brazil and concludes that such a system is likely to bring more instability to the economy. An alternative proposal of a “planning approach” to the exchange rate policy is delineated.

KEYWORDS:
Exchange rate policy; Exchange rate; trade balance; exchange rate system