Professional Documents
Culture Documents
Brazilian Stagflation
Brazilian Stagflation
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.
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.