The Burden of Exchange Rate Adjustment in Brazil

In this paper external disequilibrium in Brazil is sketched, the 1979 maxidevalu-ation is discussed, and a well-known result of open macroeconomic theory is restated, that is, that the cost of a successful devaluation is a reduction in real wages. Whenever real or relative wages are resistant, a devaluation quickly washes out. THE ECONOMY High rates of inflation and a large and growing external debt are the most serious problems that Brazil faces nowadays. During the last 30 years (1950-79), the average rate of inflation in Brazil has been 32 percent annually. Macro-economic theory predicts that inflation rates tend to become rigid once govern-ment adopts accommodating policies in relation to supply and demand shocks, and relative wage stickness makes economic recessions inefficient as a means of reducing inflation. Hence, although inflation rates vary over the business cycles, at the end of each of them they are higher than before. This phenomenon is illustrated in Chart 1, where average rates of inflation and of real growt