Political Risk Latin America Blog @PolRiskLatam

Brazil: Economic Zombies Are Back

Posted in News and Articles, Political Risk by politicalrisklatam on March 11, 2011

by Marcio Garcia for Roubini Global Economics, March 11th, 2011.

It is extremely dangerous to entertain the idea that inflation can be controlled without affecting GDP growth.

The recent Rio carnival samba school parade’s most impressive scenic innovation was presented by the Unidos da Tijuca school’s lead group with its zombies whose heads suddenly fall off.[1]  Also in the economy, some economists are once again enthusing about ideas that seemed to be long buried.  For the good of the Brazilian economy, these economic zombies should be dispatched back to their tombs.  Let’s examine them.

It is frequently argued that as,  during the Dilma Rouseff government,  the Central Bank (CB) has begun to make use of a more diversified set of so-called  macroprudential policy instruments to combat inflation,  real interest rates will be significantly lower. In fact, these instruments have been widely used in the Brazilian economy for decades to curb credit expansion. Brazilian levels of reserve requirements with the CB, which is the main instrument used, have probably been the highest in the world for decades. The proof of this is that, in 2008, the R$100 billion reduction in banks’ reserve requirements aimed at combating the crisis made a great contribution to restoring liquidity. The increase in reserve requirements in 2010, together with other measures that restricted credit growth, are not exactly a novelty in Brazil. After the Real Plan, when aggregate demand was growing at a dangerously fast pace, the CB imposed a big reserve requirement increase, even instituting an unprecedented reserve requirement on bank loans. (continue reading… )

 

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