Brazilian inflation from 1980 to 1993: Causes, consequences and dynamics

Journal of Latin American Studies

Volumn 28, Issue 3, 1996, Pages 635-662

  Tullio, G ^a   Ronci, M ^b  

^a UNIVERSITY OF BRESCIA   (Italy)

^b INTERNATIONAL MONETARY FUND   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

BUDGET DEFICIT; CENTRAL BANK; DEVELOPING COUNTRY; ECONOMIC TRENDS; INFLATION; INFLATIONARY TRENDS; NATIONAL ECONOMY;

BRAZIL;

EID: 0030435317     PISSN: 0022216X     EISSN: None     Source Type: Journal    
DOI: 10.1017/s0022216x00023919     Document Type: Article

References (31)

1. See Franco Spinelli, and Michele Fratianni, Storia Monetaria d'Italia (Milan, 1991), and Carlo Favero and Franco Spinelli, 'Deficits, Money Growth and Inflation in Italy: 1865-1990', Working paper no. 279, Queen Mary and Westfield College, University of London, October 1992.
2. See Franco Spinelli, and Michele Fratianni, Storia Monetaria d'Italia (Milan, 1991), and Carlo Favero and Franco Spinelli, 'Deficits, Money Growth and Inflation in Italy: 1865-1990', Working paper no. 279, Queen Mary and Westfield College, University of London, October 1992.
3. See Law no. 4,595 of 31 December 1964.
4. See Complementary Law no. 12 of 8 November 1971.
5. See Law no. 6,045 of 15 May 1974.
6. By way of comparison, in Germany the real stock of monetary base was about 1 per cent of GDP at the peak of hyperinflation in November 1923.
7. The actual loss of capital due to changes in indexation rules was estimated in 1991 to be 70 per cent of its real face value since 1980.
8. See Francis A. Lees, James M. Botts and Rubens Penha Cysne, Banking and Financial O Deepening in Brazil (London, 1990).
9. Medida Provisória no. 542 of 30 June 1994.
10. For a more detailed discussion of the monetary reform, see Marcio Ronci, 'In Search of a Monetary Constitution for Brazil', in Carlos Langoni, James Ferrer and Marcio Ronci (eds.), The Quest for Monetary Stability (Washington, 1995), chapter 7.
11. Carlo Azeglio Ciampi was Governor of the Bank of Italy from 1979 to 1993. See John B. Goodman, Monetary Sovereignty: The Politics of Central Banking in Western Europe (Ithaca and London, 1992), pp. 170, and Franco Spinelli and Michele Fratianni, Storia Monetaria d'Italia (Milan, 1991).
12. Carlo Azeglio Ciampi was Governor of the Bank of Italy from 1979 to 1993. See John B. Goodman, Monetary Sovereignty: The Politics of Central Banking in Western Europe (Ithaca and London, 1992), pp. 170, and Franco Spinelli and Michele Fratianni, Storia Monetaria d'Italia (Milan, 1991).
13. See Lees et al., Banking and Financial Deepening in Brazil, Table 5.4, p. 123.
14. See Giuseppe Tullio and Marcio Ronci, 'Central Bank Autonomy, the Exchange Rate Constraint and Inflation: the case of Italy; 1970-1992', forthcoming, Open Economies Review, 1996 and in Paul De Grauwe, Stefano Micossi and Giuseppe Tullio (eds.), Inflation and Wage Behaviour in the EMS (Oxford, 1996).
15. See Giuseppe Tullio and Marcio Ronci, 'Central Bank Autonomy, the Exchange Rate Constraint and Inflation: the case of Italy; 1970-1992', forthcoming, Open Economies Review, 1996 and in Paul De Grauwe, Stefano Micossi and Giuseppe Tullio (eds.), Inflation and Wage Behaviour in the EMS (Oxford, 1996).
16. It was estimated in 1989 that Brazil cleared about 7 billion cheques, 95 per cent of which were cleared in 24 hours. By comparison American Express processed on a world wide basis 28 million items a month, about the same number of cheques cleared in Brazil in a single day. During the high inflation period it was not unusual in Brazil to write cheques for less than the equivalent of two US dollars. See Lees et al., Banking and Financial Deepening in Brazil, p. 134.
17. See Novaes Walter Filho, 'Inflação e Preço de Ação de Bancos Commerciais', Disertação de Mestrado, Pontificia Universidade Católica, Rio de Janeiro, July 1988.
18. See Conjuntura Econômica, October 1995, p. 3.
19. Authors' calculation based on data published by Gazeta Mercantil: Balanço Anual, year 17, no. 17 (São Paulo, October 1993).
20. For an interesting econometric study of Brazilian inflation, see Fernando de Holanda Barbosa and Paul McNelis, 'Indexation and inflationary inertia', The World Bank Economic Review, vol. 3, no. 3 (1990), pp. 339-57.
21. See Philip Cagan, 'The monetary dynamics of hyperinflation', in Milton Friedman (ed.), Studies in Quantity Theory of Money (Chicago, 1956), pp. 25-117.
22. See Giuseppe Tullio, 'Inflation and Currency Depreciation in Germany 1920-23: a dynamic model of prices and the exchange rate', Journal of Money, Credit and Banking, May 1995, pp. 350-62.
23. For an explanation of Hendry's method, see A. Banerjee, J. Dolado, John Galbraith and David Hendry, Co-integration, error correction, and the econometric analysis of nonstationary data (Oxford, 1993).
24. For previous estimates of a reaction function for Brazil, see Roberto Marcos da Silva Montesano, Controle Monetário em Economia Aberta: O Caso Brasileiro no Período 1974-1982 (Rio de Janeiro, 1989).
25. We also performed Granger causality tests between the budget deficit, money growth and inflation. In general, we found that the deficit causes money growth and inflation.
26. We also estimated equation (I) using instrumental variables to take into account the fact that some explanatory variables may have been endogenous. In particular, the nominal budget deficit may be endogenous because the interest payments on public debt are indexed to the past inflation and tax revenues depends on the business cycle. In general, the instrumental variable estimates were very like the ordinary square estimates presented in Table 10. We decided to present only the ordinary least square (OLS) estimates because, although they yield biased and inconsistent estimators, Monte Carlo studies show that OLS estimates have relatively small variances compared with other estimation methods and in a small sample (which is the case) their smaller variances may more than offset their greater bias, so that they have smaller mean squared errors. See Ronald J. Wonnacott and Thomas M. Wonnacott, Econometrics (New York, 1970), p. 399.
27. The results of these tests are not reported here, to save space. We did not perform recursive parameter estimates, because the number of observations was not large enough. We also performed Granger causality tests between the deficit, money growth and inflation. In general we found that the deficit causes money growth and inflation.
28. For a similar reaction function estimated for Italy from 1970 to 1992, see G. Tullio and M. Ronci, 'Central Bank Autonomy, the Exchange Rate Constraint and Inflation: the case of Italy; 1970-1992'.
29. We also estimated equation (4) using instrumental variables to take into account that some explanatory variables were endogenous. In general, the results were the same as the ordinary least square (OLS) estimates presented in Table 11. We decided to present only the OLS estimates for the same reasons as explained in note 23.
30. See A. Cukierman, S. B. Webb and B. Neyapti, 'Measuring the independence of central banks and its effect on policy outcomes ', World Bank Economic Review, vol. 6 (1992), pp. 353-98.
31. The lags changed from annual to monthly in the last 30 years. See Holanda Barbosa and McNelis, 'Indexation and Inflationary inertia'.