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Brazil Fiscal and Monetary Policy, the Public Sector, and Inflation

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Brazil Fiscal and Monetary Policy, the Public Sector, and Inflation

In the 1980s, most Brazilians were convinced that the huge foreign debt was at the heart of their economic difficulties. A decade later, as other heavily indebted developing nations reduced inflation to negligible levels and began to grow again, it was more apparent that some of Brazil's economic difficulties were homemade. By the early 1990s, a new consensus had emerged among Brazilian economists and policy makers. It emphasized the role of the public sector in the economy and, more specifically, the way in which public-sector expenditures are financed.

By the late 1980s, the overhang of public debt had placed a servicing burden on the public sector that would have strained any government. Given its huge debt to private Brazilian creditors and foreign creditors alike, the public sector came to be viewed as practically bankrupt. With new foreign credit virtually eliminated after 1982 and domestic credit increasingly costly, the government's only remaining recourse was to finance its deficit through the creation of money. This led in turn to an accelerating and unpredictable rate of inflation, which by the early 1990s was more than 4,000 percent at annual rates.

Data as of April 1997






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