External financial fragility ant the limits of the exchange rate policy in Real

Luiz Fernando Rodrigues de Paula () and Antonio José Alves Júnior ()

Brazilian Journal of Political Economy, 1999, vol. 19, issue 1, 77-100

Abstract: This article assesses the impacts of Brazil’s exchange-based stabilization plan(Plano Real) on the country’s external financial fragility and discusses alternative exchangepolicy to overcome the Brazil’s external vulnerability. In order to do so, we have developedan index for this external financial fragility, which is applied to a time series of foreign sectorvariables from 1992 to 1997. The evidence shows that Brazilian external financial fragility has grown during the first three years and half after the Real Plan, particularly in 1996and 1997. Using this evidence, the paper questions the effectiveness of the government’sadjustment strategy for the industrial sector, based on four pillars: price stabilization, tradeand capital liberalization and exchange appreciation. Finally, we conclude that the scopefor changes in currently exchange policy is too small: the government is prisoner of a self--inflicted “exchange trap”. JEL Clasisifcation: F41; G28; E12.

Keywords: External financial fragility; exchange rate policy; Plano Real; currency crisis (search for similar items in EconPapers)
Date: 1999
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