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  • Brazilian Stagflation

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    Nadella Hemanth
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    Brazil experienced stagflation with over 10% inflation, negative GDP growth, and high unemployment under Governor Tombini of the central bank, fueled by corruption charges against President Dilma Rousseff involving the state-run oil company Petrobras. In contrast, previous President Lula da Silva grew the economy through infrastructure investment and tax code simplification, decreasing poverty. Tombini faced difficult policy choices between controlling inflation and unemployment as Rousseff pursued expansionary fiscal policies. Raising interest rates risked further slowing the economy, while maintaining low rates risked higher inflation.

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    Brazil experienced stagflation with over 10% inflation, negative GDP growth, and high unemployment under Governor Tombini of the central bank, fueled by corruption charges against President Dilma Rousseff involving the state-run oil company Petrobras. In contrast, previous President Lula da Silva grew the economy through infrastructure investment and tax code simplification, decreasing poverty. Tombini faced difficult policy choices between controlling inflation and unemployment as Rousseff pursued expansionary fiscal policies. Raising interest rates risked further slowing the economy, while maintaining low rates risked higher inflation.

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    51 views1 page

    Brazilian Stagflation

    Uploaded by

    Nadella Hemanth
    Brazil experienced stagflation with over 10% inflation, negative GDP growth, and high unemployment under Governor Tombini of the central bank, fueled by corruption charges against President Dilma Rousseff involving the state-run oil company Petrobras. In contrast, previous President Lula da Silva grew the economy through infrastructure investment and tax code simplification, decreasing poverty. Tombini faced difficult policy choices between controlling inflation and unemployment as Rousseff pursued expansionary fiscal policies. Raising interest rates risked further slowing the economy, while maintaining low rates risked higher inflation.

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    © All Rights Reserved
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    Case Summary

    Brazilian economy experienced a stagflation with an inflation rate of more than 10%,
    negative GDP growth and exceptionally high unemployment rate, in spite of all the best
    efforts of Alexandar Tombini who is the governor of central bank of Brazil since 2011.
    Fueling this is the corruption charges against Brazilian President Dilma Roussef who is
    facing calls for her impeachment in view of her involvement in corruption at the state-
    run oil company Petrobras.

    In contrast to the present situation president Lula DeSilva who is the predecessor
    Dilbar Rousseff has given great rule with investment in infrastructure through public
    private partnerships and simplification of the tax code that improved the living
    standards of Brazilians substantially and that increased the real GDP per capita by over
    2.85% per year. Lula’s economic policies helped to decrease the fraction of the
    population living on less than dollar 3.1 a day from 10% to 5.45%, inspite of 2008 global
    financial crisis.

    Tombhini expected that he would be able to maintain stable inflation while the economy
    grew at a positive and steady rate. There was however, always a worry in Tombini's
    mind that he could face difficult policy tradeoffs. He worried not only that scenarios
    could emerge that would force him to choose between high inflation and high
    unemployment, but also that his job security depended on the approval of Roussef.

    Tombini would almost certainly feel pressure(explicit or implicit) to accommodate


    inflation with low interest rates. Tombini raised interest rates as inflation increased in
    early 2015, but it contributed to an increase in unemployment.

    The Roussef government was pursuing expansionary fiscal policy, adding to government
    debt at an alarming rate. The increase in interest rates necessary to maintain the
    inflation target would almost certainly further accelerate the economic slowdown. But
    the short term benefit of maintaining low interest rate bore the cost of double - digit
    inflation and worrisome, rising inflation expectations.

    Tombini would need to raise rates significantly. In doing so he would likely plunge the
    economy deeper into recession. The other option would be the hope that factors
    outside tombinis control would likely plunge the economy deeper into recession.

    The only other option seemed to be the hope that factors outside Tombini's control
    would put downward pressure on costs and inflation. Brazil was notorious for its high
    costs of doing business. If the government could cut red tape and lower costs for
    businesses, those cost reductions would be passed on to consumers and hence reduce
    inflation.

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