| Introduction: | | | | change the exchange rate regime due to the high |
| This paper focuses on the exchange rate regime of | | | | growth experienced. |
| Brazil during the 1960 to 1975 period and why the | | | | During this period the policy makers believed that the |
| policy makers declined to change their exchange rate | | | | balance of trade was best managed through trade |
| regime, in 1948 brazil introduced par value for the | | | | policies such as tariffs, subsidies and import control, |
| Cruzeiro, however in 1967 the crawling peg exchange | | | | for this reason therefore there was increased |
| rate regime was introduced, the crawling peg system | | | | industrial expansion to undertake import substitution |
| was based on frequent and small adjustment in the | | | | and this ed to spectacular growth in brazil, Brazil |
| exchange rate which was to signify the changes in | | | | exports become more competitive in the international |
| inflation and prices in Brazil, this exchange rate regime | | | | due to slow inflation in the economy and Brazil seized |
| led to long term stability in the Brazilian currency the | | | | to be termed as a developing country. Due to this |
| real. | | | | strategy therefore the policy makers did not |
| In 1971 the US floated its currency and as a result | | | | concentrate much on the significance of the |
| the devaluation of the dollar would affect the | | | | exchange regime to manage balance of trade. |
| exchange of the Brazilian currency with other major | | | | However the policy maker later realised that the |
| currencies, during this period the Brazilian policy | | | | adjustments would be even more effectively |
| makers believed that the balance of payment was | | | | managed using the exchange rate system. |
| best managed by import control and export | | | | Before 1971 the US had not floated its currency and |
| incentives, trade flow was in this period controlled by | | | | because Brazil exchange rates were based on the |
| tariffs, subsidies and the direct control on trade. This | | | | dollar there was reduced shocks and inflation that |
| period was also characterised by import substitution | | | | would be caused by external forces and shocks, |
| strategy that was aimed at improving balance of | | | | however the introduction of the float regime in the |
| trade, however the policy maker later realised that | | | | US led to the devaluation of the Brazilian currency |
| the adjustments would be even more effectively | | | | and this eroded competitive prices in Brazilian exports, |
| managed using the exchange rate system. | | | | as a result this devaluation made Brazil to realise the |
| During the period Brazil exports become more | | | | importance of the exchange rate system in the |
| competitive and there was slow inflation in the | | | | economy. |
| economy and it seized to be termed as a developing | | | | As Brazil competitiveness declined in the international |
| country, there are various reasons that led to the | | | | market the policy makers changed their exchange |
| resistant of the policy makers to change the | | | | rate regime into a floating rate regime but the |
| exchange rate regime. | | | | problem persisted where the country was forced to |
| Exchange rate regimes: | | | | finance its current account deficits through debts, for |
| There are three types of exchange regimes and | | | | this reason therefore it is clear that the policy |
| they include fixed exchange rate, float exchange rate | | | | makers also declined to change their exchange rate |
| and pegged exchange rate regime, the fixed | | | | regime due to the US failing to adopt a float regime |
| exchange rate regime is that which the currency of a | | | | until 1971, after the floating of the dollar which the |
| country has direct convertibility to another currency. | | | | Brazilian economy had pegged its currency in 1971 the |
| The float rates is a regime that involves letting the | | | | Brazilian currency experienced devaluation and for this |
| supply and demand in the market to determine | | | | reason the current account deficits increased and also |
| exchange rate but the economy can intervene in | | | | this eroded competitive prices in the international |
| order to avoid depreciation, finally the pegged float is | | | | market. |
| a regime where the currency is pegged to some | | | | Conclusion: |
| value which is periodically adjusted or fixed. | | | | From the above discussion it is clear that the Brazilian |
| Brazil exchange rate regime: | | | | policy makers declined to change their exchange rate |
| In 1968 policy makers introduced a crawling peg | | | | regime, some of the reason why they failed to |
| system which was based on frequent and small | | | | change the regime is because they believed that only |
| adjustment in the exchange rate, the frequent | | | | trade policies were important in determining balance |
| adjustments were made to signify the changes in | | | | of trade, for this reason the policy makers |
| inflation and prices in Brazil, this exchange rate regime | | | | concentrated on trade policies such as tariffs, |
| led to long term stability in the Brazilian currency the | | | | subsidies and direct trade control, further spectacular |
| real and for this reason the policy makers did not find | | | | growth was experienced in this period where import |
| any reason to change the exchange rate regime at | | | | substitution strategy was aimed at production of |
| the time. | | | | consumer goods, basic inputs and capital goods and |
| The pegged exchange system reduced uncertainty in | | | | all this were aimed at improving balance of payment. |
| exchange rates of the currency, this is because the | | | | Also due to the various advantages that are |
| individuals would have the knowledge that the | | | | associated with the pegged system the country did |
| currency would not devalue or revalue by a large | | | | not change its regime this system reduced |
| margin and for this reason future production was | | | | uncertainty in exchange rates of the currency and |
| made easier regarding production. | | | | also reduced speculative attacks in the economy, |
| This system that Brazil adopted also reduced | | | | therefore the policy makers did not find any reason |
| speculative attacks associated with other forms of | | | | to change its regime. |
| exchange systems, however the economy could not | | | | In 1976 when there was a deviation in the Brazilian |
| get speculative gains from this type of exchange | | | | currency the country had no option but to put more |
| rate system. During this period also Brazil experienced | | | | emphasis on the importance of the exchange rate |
| slow inflation and prices become more competitive in | | | | regime in improving the balance of payment, this led |
| the international market, this system also allowed the | | | | to the economy changing its regime into a floating |
| country to improve its balance of payment and | | | | currency regime following the devaluation of the |
| therefore policy makers did not have the need to | | | | currency as the US dollar was floated in 1971. |