Exchange-Rate Derivatives, Financial Fragility and Monetary Policy in Brazil during the World Financial Crisis

José Luís Oreiro and Flavio Basilio

Chapter 11 in An Assessment of the Global Impact of the Financial Crisis, 2011, pp 236-260 from Palgrave Macmillan

Abstract: Abstract The crisis of subprime mortgages in the United States, which began in mid-2007 and intensified in the last months of 2008 following the bankruptcy of Lehman Brothers, brought an end to the internationally favourable situation the Brazilian economy seems to have taken advantage of in the past few years. Since September 2008, there has been a significant decrease in the level of international liquidity. Credit lines for exports shrank dramatically, slowing down export expansion, while a generalised increase in risk aversion produced an outflow of liquid capital from Brazil of the order of US$11 billion in the months of October to December 2008. Because of capital movements, between July (the valley of the exchange rate series) and December (the peak of the series) 2008, the Brazilian currency was devalued by 50 per cent against the US dollar; the depreciation in the year was 34 per cent. Panic has spread throughout the country’s banking system as a combined result of all such factors, leading to a further drastic reduction in credit to families as well as to firms. A consequence of this sort of credit evaporation was a strong deceleration in the growth pace of consumption and the otherwise already announced hold on a number of investment projects. As an overall result, the Brazilian economy experienced a 0.2 per cent fall in its GDP in 2009.

Keywords: Exchange Rate; Interest Rate; Monetary Policy; Monetary Authority; Nominal Exchange Rate (search for similar items in EconPapers)
Date: 2011
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DOI: 10.1057/9780230306912_11

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