Brazil exchange rates regime history and analysis from 1960 to 1975 (economics paper) - Essay Example

This period was also characterised by import substitution strategy that was aimed at improving balance of trade, however the policy maker later realised that the adjustments would be even more effectively managed using the exchange rate system. During the period Brazil exports become more competitive and there was slow inflation in the economy and it seized to be termed as a developing country, there are various reasons that led to the resistant of the policy makers to change the exchange rate regime.

There are three types of exchange regimes and they include fixed exchange rate, float exchange rate and pegged exchange rate regime, the fixed exchange rate regime is that which the currency of a country has direct convertibility to another currency. The float rates is a regime that involves letting the supply and demand in the market to determine exchange rate but the economy can intervene in order to avoid depreciation, finally the pegged float is a regime where the currency is pegged to some value which is periodically adjusted or fixed.

In 1968 polBrazil exchange rate regime:In 1968 policy makers introduced a crawling peg system which was based on frequent and small adjustment in the exchange rate, the frequent adjustments were made to signify the changes in inflation and prices in Brazil, this exchange rate regime led to long term stability in the Brazilian currency the real and for this reason the policy makers did not find any reason to change the exchange rate regime at the time. The pegged exchange system reduced uncertainty in exchange rates of the currency, this is because the individuals would have the knowledge that the currency would not devalue or revalue by a large margin and for this reason future production was made easier regarding production.

This system that Brazil adopted also reduced speculative attacks associated with other forms of exchange systems, however the economy could not get speculative gains from this type of exchange rate system. During this period also Brazil experienced slow inflation and prices become more competitive in the international market, this system also allowed the country to improve its balance of payment and therefore policy makers did not have the need to change the exchange rate regime due to the high growth experienced.

During this period the policy makers believed that the balance of trade was best managed through trade policies such as tariffs, subsidies and import control, for this reason therefore there was increased industrial expansion to undertake import substitution and this ed to spectacular growth in brazil, Brazil exports become more competitive in the international due to slow inflation in the economy and Brazil seized to be termed as a developing country. Due to this strategy therefore the policy makers did not concentrate much on the significance of the exchange regime to manage balance of trade.

However the policy maker later realised that the adjustments would be even more effectively managed using the exchange rate system.Before 1971 the US had not floated its currency and because