Plano Real
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The Plano Real (" Real Plan",The word ''real'' in Portuguese could be translated either to ''real'' or ''royal'' in English. The name of the plan comes from the name of the currency which was chosen to give the idea of a stable and credible purchasing power. in English) was a set of measures taken to stabilize the Brazilian economy in 1994, during the presidency of Itamar Franco. Its architects were led by the Minister of Finance and succeeding president Fernando Henrique Cardoso. The Plano Real was based on an analysis of the root causes of
hyperinflation In economics, hyperinflation is a very high and typically accelerating inflation. It quickly erodes the real versus nominal value (economics), real value of the local currency, as the prices of all goods increase. This causes people to minimiz ...
in the '' New Republic'' of Brazil, that concluded that there was both an issue of
fiscal policy In economics and political science, fiscal policy is the use of government revenue collection ( taxes or tax cuts) and expenditure to influence a country's economy. The use of government revenue expenditures to influence macroeconomic variab ...
and severe, widespread inertial inflation. The Plano Real intended to stabilize the domestic
currency A currency is a standardization of money in any form, in use or circulation as a medium of exchange, for example banknotes and coins. A more general definition is that a currency is a ''system of money'' in common use within a specific envi ...
in nominal terms after a string of failed plans to control
inflation In economics, inflation is an increase in the average price of goods and services in terms of money. This increase is measured using a price index, typically a consumer price index (CPI). When the general price level rises, each unit of curre ...
.


Background

According to economists, 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 The Daily Unidade Real de Valor, or URV (Portuguese, ''Real Value Unit''), was a non-monetary reference currency (i.e., non-fiat) created in March 1994, as part of the Plano Real in Brazil. It was the most theoretically sophisticated piece of the ...
("URV"), whose 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 did not change over time, while their equivalent in cruzeiros reais increased nominally every day.


Solution

The Plano Real intended to stabilize the domestic
currency A currency is a standardization of money in any form, in use or circulation as a medium of exchange, for example banknotes and coins. A more general definition is that a currency is a ''system of money'' in common use within a specific envi ...
in nominal terms after a string of failed plans to control
inflation In economics, inflation is an increase in the average price of goods and services in terms of money. This increase is measured using a price index, typically a consumer price index (CPI). When the general price level rises, each unit of curre ...
. It created the
Unidade Real de Valor The Daily Unidade Real de Valor, or URV (Portuguese, ''Real Value Unit''), was a non-monetary reference currency (i.e., non-fiat) created in March 1994, as part of the Plano Real in Brazil. It was the most theoretically sophisticated piece of the ...
(''Real Unit of Value''), which served as a key step to the implementation of the new (and still current) currency, the '' real''. At first, most academics tended not to believe that the Plan could succeed. Stephen Kanitz was the first public intellectual to predict the future success of the Real Plan. A new currency called the ''real'' (plural ''reais'') was introduced on 1 July 1994, as part of a broader plan to stabilize the Brazilian economy, replacing the short-lived cruzeiro real in the process. Then, a series of contracting fiscal and monetary policies was enacted, restricting the government expenses and raising interest rates. By doing so, the country was able to keep inflation under control for several years. In addition, high interest rates attracted enough foreign capital to finance the current account deficit and increased the country's international reserves. The government put a strong focus on the management of the
balance of payments In international economics, the balance of payments (also known as balance of international payments and abbreviated BOP or BoP) of a country is the difference between all money flowing into the country in a particular period of time (e.g., a ...
, at first by setting the real at a very high
exchange rate In finance, an exchange rate is the rate at which one currency will be exchanged for another currency. Currencies are most commonly national currencies, but may be sub-national as in the case of Hong Kong or supra-national as in the case of ...
relative to the U.S. dollar, and later (in late 1998) by a sharp increase on domestic
interest rates An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, ...
to maintain a positive influx of foreign capitals to local currency
bond market The bond market (also debt market or credit market) is a financial market in which participants can issue new debt, known as the primary market, or buy and sell debt security (finance), securities, known as the secondary market. This is usually in ...
s, financing Brazilian expenditures.


Result

The real initially appreciated (gained value) against the U.S. dollar as a result of large capital inflows in late 1994 and 1995, reaching as low as 0.83 per U.S. dollar during early 1995. It then began a gradual depreciation process, culminating in the 1999 January 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 Armínio Fraga Neto (born 20 July 1957, in Rio de Janeiro) is a Brazilian economist who was president of the Central Bank of Brazil from 1999 to 2003. From 1993 until his appointment to the Central Bank, he was Managing Director of Soros Fund Ma ...
, 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. The currency's appreciation was crucial to keep inflation under control. Mainly, it assured the supply of cheap imported products to meet the domestic demand and forced domestic producers to sell at lower prices in order to maintain their market shares. This was especially important in the period immediately following the adoption of the new currency, when the sudden drop in inflation caused a surge in demand. The increased imports, therefore, were essential to avoid demand-side inflationary pressures that would undermine the stabilization plan.


See also

* Economic history of Brazil *
Economy of Brazil The economy of Brazil is the largest in Latin America and the Southern Hemisphere in nominal terms. As of 2024, the Brazil, Brazilian economy is the third largest in the Americas in nominal terms, and second largest in purchasing power parity. ...


References

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External links


The 2010-10-04 episode of NPR's Planet Money
devoted to the Plano Real, describing it in simple terms 1994 in Brazil Currencies of Brazil