Macroeconomic policy regimes, real exchange rate overvaluation, and performance of the Brazilian economy (2003–2015)

ABSTRACT

The objective of this article is to present a review of the workings of the macroeconomic policy regimes in Brazil since 2003 in order to show that both the macroeconomic policy tripod and the new macroeconomic matrix were not capable of ensuring macroeconomic stability in the medium- to long term due to their incapacity to avoid a persistent overvaluation of the real exchange rate or to stop the increasing trend in primary expenditures/gross domestic product, which produced a major fiscal crisis in 2015.

KEYWORDS:

• Brazil
• economic growth
• exchange rate
• macroeconomic regimes

JEL CLASSIFICATIONS:

• E6
• E65
• O1
• O11

Notes

¹One of the main reasons for this trend growth in primary expenditures is increasing expenditures of social security due to the indexation of social security payments to minimum wage combined with ageing of Brazilian population. Since minimum wage is indexed to inflation and real GDP growth, social security payments growth rate is at least equal to growth rate of nominal GDP. The ageing of Brazilian population in the last 20 years due to the decline in fertility rates made retired population to increase at a faster rate than labor force, making social security payments to increase at a faster rate than nominal GDP. The increase in government expenditures with health care and education is also another important source of increase in primary expenditures.

²According to Haavelmo’s (1945) theorem of a balanced budget multiplier, an increase in government expenditures that is financed by an increase in tax receipts causes an increase in real output equivalent to the increase in government expenditures—that is, the government expenditures multiplier is equal to 1.

³On the numeraire effect of the minimum wage in Brazil, see Neri, Gonzaga, and Camargo (2001). The ability of firms in the tradable sector to increase prices due to increased unit labor costs is limited by external competition. That is why the trend increase in unit labor costs in manufacturing industry was followed by a reduction in profit share and return on equity, as can be seen in the work of Rocca (2015).

⁴Another problem was the resilience of inflation near 6 percent per year in the period 2011–13. If average inflation was 5.15 percent in President Lula’s second term, in the period 2011–13, average inflation rose to 6.08 percent per year. After the popular protests of 2013, the political conditions in Brazil made it impossible for the government to tolerate greater inflation acceleration, causing the Central Bank to give up its attempt to adjust the real exchange rate to a more competitive level.

⁵Guido Mantega, ”O primeiro ano da nova matriz econômica por Mantega,” O Jornal de Todos os Brasis, December 22, 2012, http://jornalggn.com.br/blog/luisnassif/o-primeiro-ano-da-nova-matriz-economica-por-mantega.

⁶The inertia in primary expenditures is due to the rigidities in the Brazilian federal budget, since almost 90 percent of expenditures cannot be reduced without the explicit authorization of the National Congress or changes in the Constitution. The 10 percent of the federal budget that can be changed by a discretionary decision of the minister of finance is constituted mainly by public investment. This means that fiscal adjustment in Brazil tends to be done by cutting investment expenditures, which has negative effects on the growth potential of Brazilian economy.

Additional information

Notes on contributors

José Luis Oreiro

José Luis Oreiro is an associate professor of economics at Universidade Federal do Rio de Janeiro and Level IB Researcher at the National Scientific Council.

Luciano D’Agostini

Luciano D’Agostini is a researcher at the Instituto de Economia, Universidade Federal do Rio de Janeiro. The study was prepared for the workshop “Central Banks in Latin America: In Search for Stability and Development” (Lima, 12 to 13 of May, 2016).