Brazil

The Plano Real ("Real Plan"), instituted in the spring 1994, sought to break inflationary
expectations by pegging the real to the U.S. dollar. Inflation was brought down to single digit
annual figures, but not fast enough to avoid substantial real exchange rate appreciation during
the transition phase of the Plano Real. The Real Plan successfully eliminated inflation, after
many failed attempts to control it. Almost 25 million people turned into consumers.
The maintenance of large current account deficits via capital account surpluses
became problematic as investors became more risk averse to emerging market exposure as a
consequence of the Asian financial crisis in 1997 and the Russian bond default in August
1998. After crafting a fiscal adjustment (A fiscal adjustment is a reduction in the
government primary budget deficit, and it can result from a reduction in government
expenditures, an increase in tax revenues, or both simultaneously.) program and pledging
progress on structural reform, Brazil received a $41.5 billion IMF-led international support
program in November 1998. In January 1999, the Brazilian Central Bank announced that the
real would no longer be pegged to the U.S. dollar. This devaluation helped moderate the
downturn in economic growth in 1999 that investors had expressed concerns about over the
summer of 1998. Brazil's debt to GDP ratio of 48% for 1999 beat the IMF target and helped
reassure investors that Brazil will maintain tight fiscal and monetary policy even with a
floating currency.
The economy grew 4.4% in 2000, but problems in Argentina in 2001, and growing
concerns that the presidential candidate considered most likely to win, leftist Luis Incio Lula
da Silva, would default on the debt, triggered a confidence crisis that caused the economy to
decelerate. Poverty was down to near 16%.
In 2002, Luis Incio Lula da Silva won the presidential elections and was re-elected in
2006. During his government, the economy began to grow more rapidly. In 2004 Brazil saw
a promising growth of 5.7% in GDP, following 2005 with a 3.2% growth, 2006 with a 4.0%,
2007 with a 6.1% and 2008 with a 5.1% growth. Due the 2008-2010 world financial crisis,
Brazil's economy was expected to slow down in 2009 between a decline of -0.5% and a
growth of 0.0%. In reality, economic growth has continued at a high rate with economic
growth hitting 7.5% in 2010.

Brazil Inflation Rate Exceeds Official Target Range in June,but nevertheless the
authorities say that the situation is under control.

Monetary policy
Thanks to the hyperinflation history, support for anti-inflation policies has been strong in
Brazil. The central bank has an inflation target of 4.5%, whereby inflation should not fall or
rise more than 200 basis points above or below the target. Although inflation increased
temporarily above the target in 2011 and in early 2013, the central bank has been successful
in keeping inflation in check, especially when Brazils dismal track record before 1994 is
taken into account. The central bank is fairly independent, although the influence of the
government over monetary policy increased somewhat in the past years. It seems that the
central bank in practice no longer aims for 4.5% inflation, but instead wants inflation to be
between 4.5% and 6.5%.
Brazils real interest rates used to be high, but have declined for many years. During
2012, the policy interest rate reached a historic low, after the central bank had cut the SELIC
rate, its main policy rate, by 525 basis points in one year. In April 2013, the started a new
tightening cycle and the central bank seems intent on regaining its credibility that had been
somewhat weakened by the earlier unprecedented easing of policy. In the past years, the
central bank has also increasingly resorted to macro prudential rules as complementary tools
for monetary policy. In practice, this has meant that the central bank tries to influence credit
growth by increasing or lowering capital and reserve requirements for banks, and not through
monetary policy, as the latter could make it more difficult to control the exchange rate.

Fiscal policy
Brazils fiscal policies have improved markedly in the past decades. Control over public
spending has increased strongly, with the already mentioned Fiscal Responsibility law
playing an important role. This allowed the government to achieve its target of running
sizeable primary surpluses. Even in 2009, when the government took to significant fiscal
stimulus, the government had a 2% of GDP primary surplus. However, Brazils sizeable
public debt and the high interest rates require a relatively high primary surplus. Thanks to
economic growth, moderate inflation and budget deficits, public debt fell as percentage of
GDP from 77% in 2002 to 54% in 2011, but increased afterwards to 58% of GDP in 2012.
Furthermore, the government missed its 3.1% of GDP 2012 primary surplus target, despite
the fact that it used several accounting tricks. Thanks to the reserves build-up and the fact that
almost all government debt is now local currency debt, the government has become a net
external creditor. With total government revenue accounting for 36.2% of GDP in 2011,
against a 26.3% average for emerging markets, the public sector is relatively big in Brazil.
Conclusion
Brazils macroeconomic situation has become much more stable in the past decades. In the
past years, the macroeconomic policies became somewhat less orthodox. The exchange rate
has become more heavily managed and the central bank seems to aim for a slightly higher

inflation target. This increases the risk of inflation overshooting the target range, which
would force the central bank to raise rates aggressively, and may thus lead to slightly more
volatility. Recently, the central bank seems to be trying to regain its credibility, while controls
on capital inflows were abolished, after the strong upward pressure on the real eased.

United Kingdom
In the 1950, 60s and 70s the government was keen to use fiscal policy to fine tune the
econom. It was felt that the government could ensure full employment by increasing AD
when necessary. During this period it appeared that there was a trade off between
unemployment and inflation as suggested by the Phillips curve.However in the 1970s the
economy experienced stagflation. This involves an increase in inflation and unemployment at
the same time. This was seen to be evidence that fiscal policy was not effective in
maintaining full employment and low inflation..Current UK demand policy tends to
concentrate on the use of Monetary policy. Monetary policy has a few advantages over fiscal
policy:
It is easier to change the interest rate than levels of tax and spending.
Fiscal policy has more side effects e.g. work incentives and impact on government
borrowing e.t.c
In 2009, the MPC cut interest rates to 0.5%. However, this dramatic cut in interest rates
appeared ineffective in getting the economy out of a recession. It appeared the economy was
in a liquidity trap. Therefore, the government also turned to fiscal policy to try to stimulate
economic activity.Government borrowing increased sharply due to falling tax revenues from
the recession and attempts to increase Aggregate Demand (e.g. VAT cut to 15%)
The Bank of Englands Monetary Policy Committee (MPC) has responsibility for
monetary policy in the UK. The MPC has nine members, four of whom are appointed by the
Chancellor. The MPC has one goal to hit its inflation target of 2%.
The inflation target
The inflation target of 2% is expressed in terms of an annual rate of inflation based on
the Consumer Prices Index (CPI). The remit is not to achieve the lowest possible inflation
rate. Inflation below the target of 2% is judged to be just as bad as inflation above the target.
The inflation target is therefore symmetrical.
If the target is missed by more than 1 percentage point on either side i.e. if the annual
rate of CPI inflation is more than 3% or less than 1% the Governor of the Bank must write
an open letter to the Chancellor explaining the reasons why inflation has increased or fallen
to such an extent and what the Bank proposes to do to ensure inflation comes back to the
target.A target of 2% does not mean that inflation will be held at this rate constantly. That
would be neither possible nor desirable. Interest rates would be changing all the time, and by
large amounts, causing unnecessary uncertainty and volatility in the economy. Even then it

would not be possible to keep inflation at 2% in each and every month. Instead, the MPCs
aim is to set interest rates so that inflation can be brought back to target within a reasonable
time period without creating undue instability in the economy.
Source: http://www.bankofengland.co.uk/monetarypolicy/Pages/framework/framework.aspx
http://www.economicsonline.co.uk/Managing_the_economy/Monetary-policy.html

Republic of Moldova
Monetary policy has been successful in maintaining inflation within the target range.
In the context of disinflationary pressures, the NBMs current monetary policy stance has
remained appropriate, and the build-up of international reserves in 2013 is welcome as it
strengthened Moldovas resilience to external shocks. Going forward, the NBM needs to
remain vigilant and be ready to adjust policies, including adopting a tightening bias to
counter emerging inflation risks stemming from the second-round effects of the recent
nominal exchange rate depreciation and looser fiscal policy. Exchange rate flexibility has
served Moldova well in mitigating the impact of external pressures. NBMs interventions in
the foreign exchange market should therefore continue aiming at preventing disorderly
exchange rate adjustments while not resisting the trend.
Fiscal policy should be geared towards a gradual reduction of the budget deficit to a
level compatible with the official assistance available over the medium term.
The projected increase in the budget deficit in 2014 (2 percent of GDP) represents a step in
the opposite direction. While the deficit could be allowed to widen in the near term to
accommodate revenue shortfalls stemming from weaker economic activity, the expenditure
envelope envisaged in the 2014 budget should be maintained. In particular, pressures to grant
ad hoc tax benefits and to increase salaries and pensions must be resisted even if one-off
revenues materialize. Going forward, fiscal policy should aim at narrowing the deficit to 1
percent of GDP (about 2 percent excluding grants) by 2018. This level of deficit would put
public debt as a share of GDP on a downward trend and be consistent with projected
financing availability. As a first step to return to a path of fiscal consolidation, the 2015
budget should be predicated on a budget deficit of 2 percent of GDP and the Medium-Term
Budget Framework commit to an annual reduction of percent of GDP in the budget deficit
thereafter. Given the large infrastructure needs, the medium-term fiscal objective could in
principle be relaxed to accommodate productivity-enhancing investment projects if financing
on reasonable terms is secured, and the additional investment is consistent with the
economys absorption capacity.
Over the medium term, fiscal consolidation needs to be achieved through structural
fiscal reforms.
In this context, administrative reform is paramount to enhance efficiency of the public sector
and improve the quality of services delivered to the population. The fiscal decentralization
model should be strengthened by tightening sub-national governments debt limits and
consolidating the number of local governments. Social security reform is also essential to put
the pension fund on a sound financial basis, deal with demographic pressures, and reverse

the decline in pension benefits relative to wages. Utility tariffs need to be adjusted to costrecovery levels to avoid further accumulation of arrears with energy suppliers and ensure an
adequate level of investment in the sector. The draft law on fiscal responsibility is a welcome
step but needs to be revised to provide better medium-term policy guidance. In particular, a
fiscal policy rule should be introduced setting a ceiling on the general government budget
deficit of 2 percent of GDP excluding grants, combined with a limit to the annual growth
of public spending, excluding targeted social assistance. The Law on Public Debt and State
Guarantees needs to be amended to set the stage for the development of local capital markets
and promote financial stability. In particular, the Ministry of Finance needs to be endowed
with statutory powers to provide funding, guarantees or indemnities to protect the stability of
the financial system.
Source: https://www.imf.org/external/np/ms/2014/043014.htm