Plano Real - The Solution

The Solution

The Plano Real or Real Plan intended to stabilize the domestic currency in nominal terms after a string of failed plans to control inflation. It created the Unidade Real de Valor (Unit of Real Value), which served as a key step to the implementation of the current currency, the real. At first, most academics tended not to believe that the Plan could succeed. Stephen Kanitz was the first public intellectual to predict the future success of the Real Plan.

The Plano Real

1. introduced a new currency called the real (plural reais) on 1 July 1994, as part of a broader plan to stabilize the Brazilian economy, the short-lived cruzeiro real was substituted in the process.
2. enacted a series of contractionary fiscal and monetary policies, restricting its expenses and raising interest rates. By doing so, the country was able to keep inflation under control for several years. In addition, the high interest rates attracted enough foreign capital to finance the current account deficit and increased the country’s international reserves.
3. put a strong focus on the management of the balance of payments,
   1. at first by setting the real at a very high value relative to the U.S. dollar
   2. later (late 1998) by a sharp increase on domestic interest rates to maintain a positive influx of foreign capitals to local currency bond markets, financing Brazilian expenditures.