The magic of Mr. Gustavo Franco, revisited

ABSTRACT After the introduction of the Real Plan in 1994 Brazil has been following a dynamic path which implied a) a strong appreciation of the real exchange rate, generating a significant deterioration of the Trade and Current Accounts and b) a heavy use of foreign loans requiring the maintenance of very high interest rates to attract new capital, in order to finance these deficits. Given the numbers involved in the Brazilian experiment, this path is not sustainable in the long run, since the foreign debt grows explosively, implying that, sooner or later, it will need to be corrected. This paper presents some simulations showing some restrictions that an equilibrium path must satisfy.