MACROECONOMICS-CIA 1

TRENDS AND MEASURES OF MONEY SUPPLY: BRAZIL

NIKITHA M

1837044

1 MA ECO

INTRODUCTION

The progress and development of any economy rests on its money supply. There are no
standard definitions for money supply since its components vary from country to country.
Money supply in general is the stock of money held by the general public in an economy at a
particular point of time. By public, we mean the households and other institutions which
exclude the government and the commercial banks. The reserves held by the government and
the commercial banks are not included since they are the money creators Money demand
comes from those who need credit to meet their transaction and speculative demands. Money
supply concept clearly draws a distinction between those who demand money and those who
create money.

Milton Friedman, An American Economist, in his monetarism theory gave us certain

significant propositions. A change in money supply affects the national output in the short
run and the price level in the long run. The impact of a change in money supply could be
easily felt in the macroeconomic and other nominal variables. Therefore, it is essential to
have a controlled and stable money supply for the significant growth of a country.

MEASURES OF MONEY SUPPLY

The money supply components of Brazil are as follows:

M0 = Coins and notes in circulation. It also includes the demand deposits held by the public
in commercial banks and other assets that can be easily converted into cash.

M1 = M0 + Savings deposits with post office

M2 = M1 + Deposits in banks for a shorter period of time

M3 = M2 + Long term deposits in banks

M0 is considered the narrow money which is highly liquid. M1, M2 and M3 forms the broad
money which is considered nearer money because they can be readily converted to cash when
required. Broad money is the general measure of money supply in a country. The money
supply is usually regulated by the central bank with the help of monetary policies. The central
bank of Brazil is known as ‘BANCO CENTRAL DO BRASIL’ which controls its money
supply with the aid of Selic rate to control inflation and deflation in the economy.
TRENDS OF MONEY SUPPLY

Currently Brazil is the eight largest economy in the world. It went through a lot of ups and
downs in order to reach its recent position globally. The Brazilian economy had been in great
crisis in the year 1994 when it faces hyperinflation. The inflation was around 2000% in the
economy. Economists have identified major reasons that contributed to the hyperinflation in
Brazil. One such factor was the creation of excess money supply by the central bank to
finance the operations of the government projects instead of borrowing funds. Lack of
savings and loose monetary and fiscal policy were also identified to be the major contributors
of the hyperinflation. The following periods showed disinflation where inflation was kept to
level of around 4-5% till 2003 by inflation targeting. In 2003, the inflation raised to 14%
because of the currency crisis. The currency of Brazil underwent major devaluation in the
mid 1990’s. When the economy started to recover in 2002, the Brazilian currency was again
attached by the speculative demand of the ruling party which pushed down the economic
growth. In early 2003, presidential elections were held. In order to prevent the currency from
further devaluation, the elected president Lula increased the interest rate. Since then the
economy has been facing steady growth.

The following graph shows the growth of the broad money in Brazil for the period 2000-2017

The graph validates the inflation faced by the economy in 2001 and 2003 when the growth of
money supply was higher. This can also be verified with the help of quantity theory of money
which shows a direct linkage between money supply and price level. From 2004-2008, the
money supply growth was steady and stable. In 2009, the money supply growth reduced
because of the recession. The later part of 2009 showed signs of recovery because of its rigid
monetary policy. The monetary policy aimed at injecting money into the economy to ease the
credit market. 2009-2012 shows a steady growth in money supply this is because of the
expansionary monetary and fiscal policy followed by the central bank and the Brazilian
government.

In 2014, there was a recession in the economy where inflation rose to around 7%. During this
period, the economic growth reduced to around 3%. The situation worsened in 2015 and
inflation increased to 10%. This is because despite the indication of recession, the monetary
and fiscal policies were controlled to bring back the credibility of the macroeconomic
variables in the economy. The economy is currently (2017) recovering from the recession and
performing well with inflation close to 4% and it was kept it control till 2018. According to
the Monetary Committee, the inflation for 2019 is projected at 3.9% and the SELIC rate at
6% as the economic growth is gaining momentum.

CONCLUSION

Thus monetary and fiscal policies are essential in regulating the money supply in the
economy. The money supply in turn determines the level of inflation. Inflation of desirable
level is good for the growth of the economy. This desirable rate of inflation is around 4.5%
for the developing economies and close to 2.5% for the advanced economies. The above
Brazilian economy also satisfies the Keynesian notion that money supply alone will not help
in reviving the economies during depression because of liquidity trap. The economy will
require the aid of fiscal measures in bringing the economy back to the equilibrium.

REFERENCES

 Barbosa-Filho,Nelson. 2008, Inflation targeting in Brazil : 1999-2006

Retrieved from:

http://www.bresserpereira.org.br/terceiros/cursos/2013/Barbosa_Inflation_Targeting_Brazil.pdf

 Meltzer,Allan, 1992, Inflation and Money in Brazil

Retrieved from:

https://pdfs.semanticscholar.org/e043/570ddaba227138670849bdc1d3338ba415ef.pdf

 Filho,Fernando, Brazil’s response: How did financial regulation and monetary policy
influence recovery?

Retrieved from:

http://www.scielo.br/scielo.php?script=sci_arttext&pid=S0101-31572011000500019

 The World Bank Data : Broad money growth (annual %)

Retrieved from:
https://data.worldbank.org/indicator/FM.LBL.BMNY.ZG?
end=2014&locations=BR&start=1991&view=chart

 The World Bank Data : Inflation, consumer prices (annual %)

Retrieved from:

https://data.worldbank.org/indicator/FP.CPI.TOTL.ZG?
end=2014&locations=BR&start=1980&view=chart