Policy space in a financially integrated world: The brazilian case in the 2000s

Abstract

This paper makes the argument that policy space in Brazil has been narrowing since the trade and capital opening made in the 1990s. This is so because the opening of the Brazilian economy has implied that real and nominal interest rates have been kept high and the real exchange rate has shown a trend towards appreciation. The behavior of the main macroeconomic prices of the Brazilian economy brought, as a minimum, two negative results to economic growth. On one hand, the annual average growth rate was reduced because structural change had been moving towards less technologically productive sectors, which deepened deindustrialization. On the other hand, short-term economic growth had become more volatile, given that the evolution of the investment position of the country increased its potential degree of external fragility.