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Stabilization

Stabilization. Importance of the Exchange Rate. Austral Plan. Heterodox Set wage-price-exchange rate controls To improve the budget Increased public sector prices Depreciated the exchange rate Imposed duties imports and export tariffs New Monetary unit was introduced: Austral.

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Stabilization

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  1. Stabilization

  2. Importance of the Exchange Rate

  3. Austral Plan • Heterodox • Set wage-price-exchange rate controls • To improve the budget • Increased public sector prices • Depreciated the exchange rate • Imposed duties imports and export tariffs • New Monetary unit was introduced: Austral

  4. Performance: • Inflation decreased • Real output decreased • Real wages decreased • When price freeze was lifted prices increased • Real tax revenues decreased • Deficit increased • Loss of confidence • Crisis • From 1985 to 1986 annual inflation decreased from 672.5 to 85.7 • By 1989 annual inflation was 3,080.5

  5. In 1989 Menem assumes the Presidency • Fiscal restraint • Prices of public services increased • Taxes increased • Deficit decreased • Inflation went from 2,314.7 in 1990 to -0.7 in 2000 • 1999-2002 Economic crisis • 1999 real GDP decreased • Were not willing to devalue the currency • Capital flight • 2001 Argentina declares a moratorium • IMF bailout

  6. Brazil • Heterodox • In 1986 the “Cruzado Plan” was adopted • General price freeze • Partial freeze on wages • Exchange rate fixed at 13.8 • A new currency was adopted, the Cruzado • Performance: Dramatic decreased in inflation • From 226 in early 1985 to 0.6 by early 1986

  7. However: • Deficit increased • Loss confidence • Inflation back to 394.6 by 1987 and up to 2,489 by 1993 • A new plan was adopted: the Real • Mix of heterodox and orthodox plan • Fiscal adjustment • Indexation of prices • Adoption of a new currency, the Real • Inflation decreased to 5.3 by 2000

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