This paper discusses the role of fiscal and monetary policies in an LDC with a major commodity export that is facing a depression abroad. The analysis is conducted in the context of a general equilibrium model which comprises a commodity-producing sector and an import-competing sector. Idle capacity and labor unemployment areassumed. Flexibility of the real exchange rate and industrial output responses to demand are the main adjustment mechanisms. The key to understanding the behavior of the Brazilian economy in 1930s is the government coffee-support policy which held the income of the export sector at a high level and hence enabled the manufacturing sector to expand. The fact that industrial output expanded in the face of both real depreciation and appreciation points to the importance of expenditure effects relative to price effects during the 1930s.

This paper discusses the role of fiscal and monetary policies in an LDC with a major commodity export that is facing a depression abroad. The analysis is conducted in the context of a general equilibrium model which comprises a commodity-producing sector and an import-competing sector. Idle capacity and labor unemployment areassumed. Flexibility of the real exchange rate and industrial output responses to demand are the main adjustment mechanisms. The key to understanding the behavior of the Brazilian economy in 1930s is the government coffee-support policy which held the income of the export sector at a high level and hence enabled the manufacturing sector to expand. The fact that industrial output expanded in the face of both real depreciation and appreciation points to the importance of expenditure effects relative to price effects during the 1930s.

This paper highlights the institutional features of the inflation process and contrasts two stabilization efforts in 1964-66 and in 1986.The inflation process in Brazil is highly institutional. It does not resemble hyperinflations where pricing and wage setting are geared to the exchange rate by the hour, making it possible to stop inflation by simply containing money creation and fixing the exchange rate. The two stabilization programs demonstrate that an incomes policy is an essential ingredient to non-recessionary stabilization. But they also show that demand restraint is inevitable if disinflation is to be viable. The 1964 program was gradualist and two-handed, relying on the supply side on wage repression. The 1986 plan was a heterodox shock treatment centered around an uncompromising price freeze and paying insufficient attention to the need for fiscal restraint.