The tale of the contagion of two crises and policy responses in Brazil: a case of (Keynesian) policy coordination?

Abstract

This paper aims to assess the reasons for the economic slowdown in Brazil after 2010. In particular, it contributes to a better understanding of why Brazil’s countercyclical policies succeeded in handling the contagion resulting from the Lehman Brothers crisis but did not manage the contagion caused by the euro crisis. The paper examines what we understand by Keynesian policies and the importance of policy coordination and then evaluates the extent to which Brazil used coordinated economic policies in the face of both crises. The main hypothesis of the paper is that the difference in the performance of the countercyclical policies in both crises is related mainly to Brazil’s lack of coordination of macroeconomic policies in 2011–12, especially the implementation of fiscal policy.

Key words:

• countercyclical policies
• financial crises
• Brazil

Notes

¹See, among others, Carvalho (1992) and Davidson (1994).

²The current account balance over GDP was 1.4 percent on average from 2003 to 2006 but dropped to 0.1 percent in 2007 and −1.8 percent in 2008.

³More on this matter is included in the next section.

⁴The BNDES (Brazilian Development Bank) received approximately R$100 billion in new resources from the National Treasury in 2009.

⁵This spectacular increase was in part due to the statistical effect of the extremely low GDP in 2009.

⁶The Sistema Especial de Liquidação e Custodia (Selic) (Special Clearance and Escrow System) is the Central Bank of Brazil’s system for performing open market operations in execution of monetary policy. The Selic rate is the BCB’s overnight rate.

⁷For more information about Roussef’s economic policy in 2011–12, see FUNDAP (2012).

⁸The reserve requirements, which have historically been high in Brazil, were reduced from 53.0 percent to 47.0 percent for sight deposits (October 2008) and from 19.0 percent to 17.5 percent for time deposits (September 2009).

⁹The Selic rate is the Central Bank of Brazil’s overnight rate. It works as a benchmark interest rate or a base rate, through which the level of interest rates in the Brazilian economy can be influenced.

¹⁰The market share of Itau, Bradesco, and Santander—the three major private banks—was 46.9 percent of the banking sector in June 2012 (in terms of total assets).

¹¹According to BCB data.

¹²The exchange rate in Brazil is defined as R$/US$, that is, how many Brazilian reais are necessary to buy one U.S. dollar. Note that an increase in the exchange rate represents currency devaluation, while a decrease means currency appreciation.

¹³According to MDIC data, the nations that Brazil imported to most in 2012 were China (15.3 percent of total imports), the United States (14.5 percent), and Argentina (7.4 percent).

¹⁴Furthermore, we can consider a hysteresis phenomenon: years of currency appreciation created a type of behavior for domestic firms (replacing domestic capital goods and raw materials with imported materials) that did not immediately change, especially if one considers that a devaluation of 25–30 percent was not enough to compensate for the enormous currency appreciation of the previous years (Figure 5). However, some studies empirically demonstrate that the real exchange-rate elasticity of Brazilian imports is relatively small because most Brazilian imports consist of products (complex chemicals, electronic components, oil, transportation services, etc.) that the domestic economy simply cannot supply adequately (Santos et al., 2014).

¹⁵The policy of resources injections into the BNDES was maintained in 2010 with further input of R$80 billion. In subsequent years, these injections continued in decreasing amounts.

¹⁶TJLP—the long-term interest rate is the reference rate for BNDES loans. It is defined by the National Monetary Council.

¹⁷One further possible reason for the low influence of the fiscal multiplier in 2012 was the decrease in the expansion of consumption due to the higher household debt/income ratios.

¹⁸The primary fiscal surplus was 2.38 percent of GDP in 2012.

Additional information

Notes on contributors

Luiz Fernando de Paula

Luiz Fernando de Paula is a professor of economics at the University of the State of Rio de Janeiro (UERJ) and a researcher at the Brazilian National Council for Scientific and Technological Development (CNPq).

André de Melo Modenesi

André de Melo Modenesi is an associate professor at the Institute of Economics at Federal University of Rio de Janeiro (UFRJ) and a researcher at the CNPq.

Manoel Carlos C. Pires

Manoel Carlos C. Pires is a researcher at the Institute for Applied Economic Research (IPEA).