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BEIJING LANGUAGE & CULTURE UNIVERSITY The School of International Business "International Economics"

EVOLUTION OF BRAZIL EXCHANGE RATE REGIME

Teacher Student: Heloisa Cristina dos Santos ()

2013

INTRODUCTION A country's history can be told through their monetary arrangements? Maybe not all but certainly the money shows evidence of political situations, behaviors, ideologies, and especially economic structure. Register of times and not only capital value, money has become, since the beginning, object attractive to scholars, philosophers, historians, artists and even, merely curious. In this work, will be compiled a chronology linking historical facts and the monetary policy arrangements in Brazil.

Brazilian Monetary System History Colonial Period (From 1500 to 1822) The first money used in Brazil was the commodity money. For a long time, the trade was done through the exchange of goods, even after the introduction of the coin metal. The first coins (gold, silver and copper) arrived with the beginning of Portuguese colonization about year 1500 until 1530. As the integration with Portugal growth, the Brazilian economy also developed in the shadow of Portugal standards. The monetary unit of Portugal was called REAL, created in 1112, and it was used in Brazil during the colonial period. During this period everything was counted in Reis (popular plural of Real currency) coin manufactured in Portugal and Brazil. [1] As the South America region was divided between Spain and Portugal, there was a big influence of Spain in Brazilian region as well. During the colonial period there were also Spanish currency circulating in the Brazilian territory, it was called Reales (Royal plural), minted in Spain and the Spanish American colonies. In 1582, the Portuguese government has set equivalence between the Spanish American reales and reis of Portugal, where eight reales were worth 320 reis. The real or reis remained throughout the colonial Brazil. The Real lasted up to 07 October 1833. Although the monetary standard remained the same, the name of currency changed to Mil-reis (or multiples of real), it was used as currency until Oct 31. 1942. [1] Brazil Independent from Portugal The Independence of Brazil is one of the most important historical facts of the country, as it marks the end of Portuguese rule and the conquest of political autonomy. As an independent country Brazil struggled to build its economic structure. In the twentieth century, Brazil has adopted nine monetary systems or nine different currencies (Mil-

ris, Cruzeiro, Cruzeiro Novo, Cruzeiro, Cruzado, Cruzado Novo, Cruzeiro, Cruzeiro Real, and Real) [2] In 05, October 1942, a new currency, Cruzeiro, replaced the Mil-Reis, on the basis of 1.00 Cruzeiro per 1,000.00 Mil-Reis. The term "Cruzeiro" stems from the gold coins (weighed in grams to the title of 900 milliseconds and 100 milliseconds metal alloy suitable), the regime as pegged to gold as the gold monetary standard. [2] To deal with hyperinflation, Brazilian government seized five economic plans. In 1965 was created the Central Bank of Brazil, replacing the former Superintendence of Money and Credit - SUMOC absorbing equally normative and executive functions before the office of the Bank of Brazil. Some of the main function of The Central Bank of Brazil: The next monetary reform happened in 1965, the devaluation of the Cruzeiro led to the creation of the Novo Cruzeiro, on the parity of 1 Cruzeiro Novo to 1,000 Cruzeiro, but the Novo Cruzeiro lasted only five years. Novo Cruzeiro was crawling pegged to the U.S. dollar, which was based on frequent and small adjustment in the exchange rate; the frequent adjustments were made to signify the changes in inflation and prices. [3] From May 1970, the Brazilians would again use the Cruzeiro as currency; the relation was 1 Cruzeiro Novo to 1 Cruzeiro. In February 1986 A currency changeover was effected by the creation of the Cruzado (Cz$) equals to 1,000 Cruzeiros. From 3 March of 1986 until 24 of November of 1986 The "crawling-peg" system was suspended, the a fixed official rate of Cz$13.77/13.84 per U.S. Dollar. After this period the "crawling-peg" adjustments of the exchange rate vis--vis, the U.S. Dollar were resumed. The Cruzado lasted three years. [4] The Summer Plan, announced in January 1989, dismissed the Cruzado and created the Novo Cruzado, worth a thousand times greater than the Cruzado, previous currency. In the

Floating Market (Manual Market) Rate was NCz$1.20/1.50 per U.S. Dollar and was the rate was determined freely between participants. The Novo Cruzado lasted just over a year. [4] In March 1990, the Collor Plan replaced the Novo Cruzado to Cruzeiro at par. In an attempt to contain the high inflation rates in July 1993, the government created Cruzeiro Real that worth a thousand of Cruzeiros. The external value of the unit of Cruzeiro Real would be determined by supply and demand in the interbank exchange market. [4] The Cruzeiro Real was a transitional currency that circulated during only eleven months in Brazil. In July of 1994, the current Brazilian currency called Real was established and has remained a relatively stable currency to this day. As Real has been used until nowadays the next chapter will explain the detailed information about Real currency. In order to better explain all the currencies changes in Brazil history the below frame was compiled. BRAZILIAN CURRENCY EVOLUTION DATE NAME DESCRIPTION About 1500 REIS PORTUGAL CURRENCY 5 outubro, 1942 CRUZEIRO NEW CURRENCY 16 fevereiro, 1967 NOVO CRUZEIRO CUT OF THREE ZEROS 15 maio, 1970 CRUZEIRO RETURN OF CRUZEIRO 28 fevereiro, 1986 CRUZADO CUT OF THREE ZEROS 16 janeiro, 1989 NOVO CRUZADO CUT OF THREE ZEROS 15 maro, 1990 CRUZEIRO RETURN OF CRUZEIRO 1 agosto, 1993 CRUZADO REAL CUT OF THREE ZEROS 1 julho, 1994 REAL NEW CURRENCY
Source: Authors compilation

SYMBOL R$ Cr$ NCr$ Cr$ Cz$ NCz$ Cr$ CR$ R$

Real Plan: New Currency Real Plan was an economic plan that included the introduction of a new currency, the Real (R$), not completely fixed to the U.S. dollar, the exchange rate system was a managed peg, or crawling peg. The currency could move value by a target amount, estimated at 8 percent per year, within this limited band the currency was allowed to flow. If the currency was about to

surpass the band then the central bank would intervene in the foreign exchange rate market to keep the currency from surpassing the band. The Real Plan at the crawling peg system was very successful and government managed to control the inflation rate. As a result of the valuation of the exchange rate due the policy to maintain price stability in the exchange rate anchor, the deficit in current transactions had grown. By January 1999, the Brazilian fiscal deficit was close to 6 percent of GDP with interest rate payments on the countrys debt close to 10 percent of GDP, making its debt profile unsustainable. At this point Brazilian government abandoned the crawling peg system and adopted the Managed Float Exchange Rate. [4] The managed float exchange also known as dirtyfloat is defined by Wikipedia as an exchange rates regime in which rates are allowed to daily fluctuate, but there is also the intervention of countrys central bank that attempt to influence their countries' exchange rates by buying and selling currencies. [5] Although Brazil still faces big economic challenges as control the inflation, nowadays, it does not face the other problems that were prevalent when it abandoned the crawling peg exchange rate regime. The countrys fiscal deficit was 2.47 percent of GDP in 2012 and the primary surplus was 2.38 percent of GDP the same period in 2012. [6]

CONCLUSION

According to the subject studied in this paper can analyze the importance of the exchange rate regime to the stability and economic growth. Brazil has suffered for decades with hyperinflation because it could not establish an effective monetary policy which led through so many changes in exchange rate policy. Only with the implanting of the Real plan and the managed float exchange regime Brazil government was able to control inflation and keep the economy stable.

BIBLIOGRAPHIC REFERENCES [1] MOEDAS DO BRASIL. Moedas Brasileiras. Available in

http://www.moedasdobrasil.com.br/timeline4.asp. Accessed in 15 Abr. 2013. [2] OBSERVATORIO DE LA ECONOMA LATINOAMERICANA. A Poltica Econmica e o Sistema Monetrio. Available in http://www.eumed.net/cursecon/ecolat/br/07/nk.htm.

Accessed in 15 Abr. 2013. [3] Economics Group. The Brazilian Exchange Rate Conundrum. Available http://www.realclearmarkets.com/blog/BrazilianExchangeRate_06302011%5B1%5D.pdf. Accessed in 15 Abr. 2013. in

[4] INTERNATONAL ECONOMIES. Historial Exchange Rate Regime. Brazil. Available in http://intl.econ.cuhk.edu.hk/exchange_rate_regime/index.php?cid=18. Accessed in 15 Abr. 2013. [5] WIKIPEDIA. Managed float regime. Available http://en.wikipedia.org/wiki/Managed_float_regime. Acessed in 17 Abr. 2013. [6] MERCOPRESS. Brazil overall budget deficit. Available http://en.mercopress.com/2013/02/01/brazil-overall-budget-deficit-2.47-of-gdp-and-primarysurplus-of-2.38-gdp. Acessed in 17 Abr. 2013 in

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