A note on the Pazos-Simonsen mechanism and Kaldor's early research on Latin American inflation

In contrast with the inflationary finance story, inflation acceleration in Latin America has been explained as the result of the interaction of inflation dynamics and the frequency of wage adjustments. Accordingly, small inflation disturbances are connected with a shift from moderate to high inflation (or beyond to hyperinflation) though a mechanism that makes adjustment intervals in wage contracts endogenous. Rudiger Dornbusch (1986) labeled this process the "Pazos-Simonsen mechanism". In this note we summarize the basic contribution of both Felipe Pazos (1978) and Mario Henrique Simonsen (1983) and find crucial differences between their views on wage dynamics, specifically regarding the endogeneity of the time interval between wage readjustments. A remarkable affinity with Pazos's view on wage dynamics and inflation is found in an early and almost unknown essay written by Nicholas Kaldor in 1957 (inspired in his brief experience in Latin America).

The value of the exchange rate and the Dutch disease

This paper revisits the original (2008) paper on the Dutch disease, which defined it by the existence of two exchange rate equilibriums (the current and the industrial exchange rate equilibriums). Its novelty is in claiming that, as we have a value and a market price for each good or service, we also have a value and a market price for foreign money. The value is the cost plus reasonable profit corresponding to the exchange rate that makes competitive the country's competent business enterprises; the nominal exchange rates floats around the value according to the demand and supply of foreign money. This basic distinction of the exchange rate in terms of value and in terms of price allows us to understand that the two equilibriums are defined in value terms, and opens room for a clear distinction of the policies that affect the value from the ones that affect the market price of the exchange rate.

Convenções financeiras e a taxa básica de juros no Brasil: uma primeira aproximação

Financial conventions and basic interest rate in Brazil. This article discusses the thesis that the Brazilian interest rate is a convention, focusing on the basic interest rate under the inflation targeting regime. On the one hand, there are some complications involved in this debate. In order to show this, we consider the theoretical works that have been references for the Brazilian economists who see an interest rate convention in the country. On the other hand, despite the difficulties, it is possible to find signs of conventionality in the determination of the Brazilian basic rate, by analyzing two properties of conventions: conformity of some with the conformity of others; and arbitrariness.

On high interest rates in Brazil

This article examines the question of why interest rates are so high in Brazil as compared to the international average. It looks at theoretical arguments based on excessive government deficits, structural lack of private savings, inflation bias, excessive investment demand and fear of floating. An informal look at the evidence does not strongly corroborate any of these arguments. Hence a wise central bank should consider "testing" the market to make sure it is not dealing with an extreme equilibrium configuration or a long standing disequilibrium.

Effects of overvaluation and exchange rate volatility over industrial investment: empirical evidence and economic policy proposals for Brazil

The present article aims to analyze the recent behavior of real exchange rate in Brazil and its effects over investment per worker in Brazilian manufacturing and extractive industry. Preliminary estimates presented in the article shows an over-valuation of 48% of real exchange rate in Brazil. The reaction between the level (and volatility) of real exchange rate and investment (per worker) in Brazil is analyzed by means of a panel data econometric model for 30 sectors of Brazilian manufacturing and extractive industry. The empirical results show that the level and volatility of real exchange rate has a strong effect over investment per worker in Brazilian industry. Finally, we conclude the article presenting a proposal for a new macroeconomic regime that aims to produce an acceleration of economic growth of Brazilian economy and, by that, a catching-up process with developed countries.

Trade rules and exchange rate misalignments: in search for a WTO solution

The debate on the link between trade rules and rules on exchange rates is raising the attention of experts on international trade law and economics. The main purpose of this paper is to analyze the impacts of exchange rate misalignments on tariffs as applied by the WTO - World Trade Organization. It is divided into five sections: the first one explains the methodology used to determine exchange rate misalignments and also presents its results for Brazil, U.S. and China; the second summarizes the methodology applied to calculate the impacts of exchange rate misalignments on the level of tariff protection through an exercise of "misalignment tariffication"; the third examines the effects of exchange rate variations on tariffs and their consequences for the multilateral trading system; the fourth one creates a methodology to estimate exchange rates against a currency of the World and a proposal to deal with persistent and significant misalignments related to trade rules. The conclusions are present in the last section.