Everything about The Plano Real totally explained
The
Plano Real (Portuguese,
Real Plan) was a set of measures taken to stabilize the
Brazilian economy in early 1994, under the direction of
Fernando Henrique Cardoso as the Minister of Finance, during the presidency of
Itamar Franco.
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Its architects include, among many others,
Pérsio Arida,
André Lara Resende,
Edmar Bacha,
Gustavo Franco,
Pedro Malan,
Winston Fritsch and
Francisco Pinto.
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According to economic academics, one of the causes of inflation in Brazil was the inertial inflation phenomenon. Prices were adjusted on a daily basis according to changes in price indexes and to the exchange rate of the local currency to the U.S. dollar.
Plano Real then created a non-monetary currency, the
Unidade Real de Valor ("URV") which value was set to approximately 1 US dollar. All prices were quoted in these two currencies, cruzeiro real and URV, but payments had to be made exclusively in cruzeiros reais. Prices quoted in URV didn't change over time, while their equivalent in cruzeiros reais increased nominally every day.
The Plano Real based its actions on an analysis of the root causes of
inflation in the post-
military dictatorship Brazil that concluded that there was both an issue of
fiscal policy and severe, widespread
inertial inflation.
The Plano Real or
Real Plan intended to stabilize the domestic
currency in
nominal terms after a
string of failed plans to control
inflation. It created the
Unidade Real de Valor (
Real Unit of Value), which served as a key step to the implementation of the current currency, the
real.
The
Plano Real introduced a new currency called the real (plural reais) on 1 July 1994, as part of a broader plan to stabilize the Brazilian economy, the short-lived cruzeiro real was substituted in the process.
The real initially appreciated (gained value) against the U.S. dollar as a result of the large amount of capital inflows in late 1994 and 1995. It then began a gradual depreciation process, culminating in the 1999 January Brazilian currency crisis, when the Real suffered a maxi-devaluation, and fluctuated wildly. Following this period (1994-1999) of a quasi-fixed exchange rate, an inflation-targeting policy was instituted by new central bank president Arminio Fraga, which effectively meant that the fixed-exchange period was over. However, the currency was never truly "free," being more accurately described as a managed or "dirty" float, with frequent central bank interventions to manipulate its dollar price.
It also was characterized by a strong focus on the management of the
balance of payments, at first by setting the
real at a very high
value relative to the
U.S. dollar and later (late 1998) by a sharp increase on domestic
interest rates to maintain a positive influx of foreign capitals to local currency
bond markets, financing Brazilian expenditures.
The Plano Real partly incorporated policies and ideas from the
Washington Consensus.
Further Information
Get more info on 'Plano Real'.
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