Luiz Carlos Bresser-Pereira
Revista de Economia Política 17(1) janeiro 1997: 143-146.
An disguised critique of exchange rate policy in Brazil after the Real Plan. When the exchange rate is overvalued and the trade balance is negative, there are three forms of devaluating the local currency: direct devaluation, fiscal adjustement, and increase of productivity at a higher rate than the competitors. The three forms involve a change in relative prices, with the reduction of the prices of nontradables in relation to tradables, and, so, a relative reduction of real wages. Productivity increase is a first best, since it does not entail real wage reduction, fiscal adjustment is a second best, since it is anayway necessary and does not contain the risk of inflation. Given this risk, direct devaluation is a third best. Yet, since it is impossible to control productivity increase in the competing economies, and since fiscal adjustment leads to devaluation only indirectly as it reduces the demand for non-tradables, quite often policymakers resort to the third best alternative.
