Tuesday, December 4, 2012

The Case of Brazilian Inflation: Perception Problem or Stealth Devaluation?


For decades, Brazil suffered from inflation. So much so, that public confidence in the currency (the cruzeiro) suffered. Prices continually rose from week to week.

So Brazil printed a new currency that always stayed at a fixed rate: The Unit of Real Value. (By the way, this is why the Brazilian currency is called a real).

If eggs cost 20 cruzeiros, they cost 2 URVs. If eggs cost 40 cruzeiros next, they still cost 2 URVs. Eventually, people started using the Real and inflation abated.

Or so the story goes.

Here's a good basic summary of the situation from NPR
A more detailed academic version is here.

Being a cynical sort, I ask myself if this wasn't a stealth devaluation of the currency? Goes beyond an innocous perception problem. Think about that.

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