The unfinished stabilization of the Real Plan: an analysis of the indexation of the Brazilian economy

The aim of this chapter is to review the discussion about price indexation in the Brazilian economy and its effects over the persistence of average long-term inflation at a moderate but still high level over the last two decades. The Real plan, adopted between 1993 and 1994, was successful in removing the short-term price indexation mechanisms and disarming the inflation memory effect through the introduction of an indexed currency in two different phases. However, the plan did not remove all existing indexation mechanisms in the economy. Our econometric exercises show that, in the period 1995-2020, the Real Plan has been required high short-term interest rates to keep inflation at moderate level. Given that, the chapter concludes that inflation stabilization in Brazil is still an unfinished process.