The Conceptual Evolution of Inflation Inertia in Brazil
UNIVERSIDADE DE SÃO PAULO FACULDADE DE ECONOMIA, ADMINISTRAÇÃO E CONTABILIDADE DEPARTAMENTO DE ECONOMIA PROGRAMA DE DOUTORADO EM ECONOMIA DO DESENVOLVIMENTO
The Conceptual Evolution of Inflation Inertia in Brazil
A Evolução do Conceito de Inércia Inflacionária no Brasil
André Roncaglia de Carvalho Orientador: Prof. Dr. Pedro Garcia Duarte
SÃO PAULO 2015
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Prof. Dr. Marco Antonio Zago Reitor da Universidade de São Paulo
Prof. Dr. Adalberto Américo Fischmann Diretor da Faculdade de Economia, Administração e Contabilidade
Prof. Dr. Hélio Nogueira da Cruz Chefe do Departamento de Economia
Prof. Dr. Márcio Issao Nakane Coordenador do Programa de Pós Graduação em Economia
ANDRÉ RONCAGLIA DE CARVALHO
The Conceptual Evolution of Inflation Inertia in Brazil
A Evolução do Conceito de Inércia Inflacionária no Brasil
Tese apresentada ao Programa de Pós Graduação do Departamento de Economia da Faculdade de Economia, Administração e Contabilidade da Universidade de São Paulo, como requisito parcial para obtenção do título de Doutor em Ciências.
Orientador: Prof. Dr. Pedro Garcia Duarte
Versão Corrigida
SÃO PAULO 2015
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FICHA CATALOGRÁFICA Elaborada pela Seção de Processamento Técnico do SBD/FEA/USP
Carvalho, André Roncaglia de. The conceptual evolution of inflation inertia in Brazil / André Roncaglia de Carvalho. -- São Paulo, 2015. 239 p.
Tese (Doutorado) – Universidade de São Paulo, 2015. Orientador: Pedro Garcia Duarte.
1. Inflação - Brasil. 2. Conflito social - Brasil. 3. Inflação inercial – História -1980 - Brasil. 4. Estruturalismo. 5. Estabilização econômica. I. Universidade de São Paulo. Faculdade de Economia, Administração
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To my family, in honor of Alzira Rosa Roncaglia (in memoriam)
and Joana Cajuela de Carvalho (in memoriam )
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ACKNOWLEDGEMENTS
Academic work is hardly a one person job. Many contributions come in many forms and stem from a variety of sources. Therefore, I would like to thank my advisor Professor Pedro Garcia Duarte for his support, dedication, patience, friendship, and understanding during the writing of this thesis. It was an honor to have benefitted from his extensive knowledge and wisdom.
I am especially grateful to Professor Gilberto Tadeu Lima, whose seemingly unbounded knowledge and wisdom are coupled with a generous heart and an unbending sense of duty. His promptness in helping out whenever needed was only always matched by his patience in listening and discussing (repeatedly) the doubts and dilemmas I faced during the development of this work – truth be told, time and again, I barged in his office unannounced, just to say hello, and ended up leaving some 50 minutes later; not once did I get slightly frowned upon for disturbing his work; quite the contrary.
To Professor Renato Colistete, who constituted, along with Prof. Lima, the prospectus defence committee, I am grateful for the challenging critiques and helpful suggestions, which made a great difference in the preparation of this thesis. Prof. Colistete has an uncommon combination of a keen eye for the detail without missing the whole picture.
To Professor Jorge Soromenho I give my heartfelt gratitude for all the attention devoted to me during my studies and for his generous intellectual embrace whenever doubt befell me. As a post scriptum , I am wholeheartedly grateful to the external members of the thesis defence committee, Professors Maurício Coutinho (UNICAMP) and Marco Cavalieri (UFPR) for their attentive reading and helpful thought provoking comments on this work.
To Professors Peter Skott and Mark Setterfield for their incredible encouragement and advice during my stay in the amazingly pleasant University of Massachusetts Amherst. To Professors Lance Taylor, Edmar Bacha and Luiz Roberto Cunha for sharing their recollections of those troubled 1980s. Maria Clara do Prado was also kind enough to provide me a great historical overview of the politics behind the Real plan, from an “insider’s” perspective. I am truly grateful as well to Professors Kenneth Arrow, Maria Cristina Marcuzzo, Carlos Mallorquín and Anthony Thirwall for their prompt replies to my inquiries about Nicholas Kaldor and his early days as an economist at Cambridge.
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To my recently acquired foreign brothers, Wouter Schmit Jongbloed and Mark Kirstein for allowing me to benefit from their charisma, unending wits and overwhelming culture and, above all, their remote help through long discussions on the matter of this thesis and many others and for carefully reading pieces of this work. To Tomas Rotta, for his friendship and support during my stay in the US. To all of you I devote my undying gratitude.
To all administrative staff at the economics department at USP, and especially to Alda, Pinho and Leka, for their attention and unswerving professionalism. To Ismael, for being such a good friend throughout the last moments of this process. A special and wholehearted thanks goes out to the amazing Library staff that has always welcomed me in a most caring and helpful way, led by the gracious Margarida. Without you, none of this thesis would have come to life.
To USP and FEA for their fundamental role in my academic and personal growth. To my friends at FEA: Joelson Sampaio, André Mountian, Eliane Teixeira Guilherme Oliveira, Paula Pereda, Moisés Vassalo, Toni Ricardo, Juliana Scriptore, Lucas Chagas, Juliana Inhasz, Pedro Funari e Mauricio Matsumoto for their friendship and direct help on this work, in the form of suggestions and critiques. To my friends at FECAP: Pedro Barros, Daniel Oliveira, Jésus Lisboa, Allexandro Mori, José Carlos Domingos Silva and Nelson Cantarino, for their friendship and support which contributed, directly or indirectly, to this work.
To my family – my parents Antonio Caetano and Eliseth, my brother Eduardo, and my nephews Renan and Bernardo for putting up with all of my absences and always having a warm smile awaiting my belated arrivals to our gatherings. To my parents in law and in spirit, Carlos and Rosa, whose unwavering support breeds tears in my eyes whenever I think of them.
To close these acknowledgements I send my heart out to my keenest person. I bow in gratitude to my loving wife Fernanda, for her partnership, her affection in the most turbulent moments, her endless dedication and support and, above all, her patience and respect throughout this long process. Few have been so blessed as I have!
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ABSTRACT
This work aims to contribute to the wider body of research in history of economics in Brazil by focusing on the conceptual evolution of inflation inertia. Its motivation lies in the conceptual gap that appeared, following disinflation in 1994, between the stabilization debates carried out in the 1980s and the way economists in Brazil began to describe downwardly rigid inflation patterns from the 1990s onwards. More precisely, we explore the “inertial inflation episode” as a chapter in a longer tradition of adaptations, to country specific realities, of theoretical influences coming from the economics profession at the international level, in the late 1970s, when the inertial inflation hypothesis was brought to the fore. Our narrative reveals that this stubborn inflationary phenomenon had been previously dealt with in the debates in Latin America about growth and inflation back in the 1950s and 1960s, where a host of contributions sprung from various traditions, which were gradually synthesized by the saw tooth model of real wages, also known as Simonsen Pazos mechanism. We analyze the recurrent opposition between a monetarist and a heterodox structuralist type of thinking in their two rounds, in the 1950s and again in the 1980s. The connection between these two opposing schools is operated by the contributions by Mario Henrique Simonsen and the self declared neo structuralist economists at PUC Rio. Based on a careful and detailed analysis of the latter’s modeling strategies and conclusions, we show that, along the 1980s, these economists gradually shift towards a more ecumenical approach, inviting monetarist elements into their analyses while downplaying the relevance of the inertial component. Finally, when the 1990s came, the rise of a macroeconomic consensus began to conceptualize “inflation inertia” as the time delay between a real or monetary shock and the response by price level changes, leaving the concept of “inflation persistence” to account for the deviations of inflation away from its equilibrium value, a view that undergirds how most Brazilian economists now understand this phenomenon. We assess how “inflation inertia” has been understood in the aftermath of the monetary reform in Brazil in 1994, by analyzing the backstage papers that circulated within the economic team in charge of the Real Plan. We conclude that there are elements of continuity between the two rounds as regards the concept of inertia, but that they are now stripped of their previous dense historical and institutional substance.
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RESUMO
O presente trabalho busca contribuir para a literatura de história do pensamento econômico brasileiro, ao estudar a transformação do conceito de inércia inflacionária no Brasil desde os debates sobre estabilização na década de 1980 até o período pós Real, mudança essa que permanece inexplicada pela literatura. Mais precisamente, o trabalho busca verificar a hipótese de que a inflação inercial não passou de um episódio de uma longa tradição de adaptações teóricas de influências oriundas de economistas estrangeiros, em especial na década de 1970, quando a hipótese de uma inflação inercial foi levantada. Nossa narrativa revela que o fenômeno da rigidez inflacionária já havia sido previamente compreendido e teorizado nos debates na América Latina, nas décadas de 1950 e 1960, quando inúmeras contribuições foram eventualmente sintentizadas no modelo de rendas contratuais sob inflação no formato de “dente de serra”, ou o assim chamado mecanismo Simonsen Pazos. A narrativa adota a controvérsia entre monetaristas e estruturalistas em seus dois momentos como eixo da análise, para mostrar como o desaparecimento dessa oposição coincide com a emergência do consenso macroeconômico em escala internacional. Baseando se em uma análise cuidadosa e detalhada das contribuições dos economistas neo estruturalistas da PUC Rio e da onipresente influência de Simonsen como um sintetizador das contenciosas escolas, o trabalho apresenta evidências documentais de uma transformação estruturalista da segunda geração. Ao longo dos anos 1980, esses economistas gradualmente convergiram para uma abordagem mais ecumênica com relação aos monetaristas, reduzindo a importância do componente inercial da inflação e ampliando a relevância de aspectos usualmente associados à ortodoxia econômica. Finalmente, no período pós Real, passa a predominar no país um conceito de inércia inflacionária que constrasta com a visão anterior dos economistas atuando no referido plano de estabilização. Esse novo conceito está associado à emergência da “nova síntese neoclássica”, na qual a inércia é compreendida como o atraso na resposta dos níveis de preço a choques monetários ou reais, enquanto o conceito de persistência inflacionária representa desvios duradouros da inflação com relação ao seu nível de equilíbrio. Para compreender se essa mudança pode ser considerada uma ruptura com relação ao passado, analisam se os artigos que circularam nos bastidores do Plano Real dentro da equipe econômica. Nosso trabalho conclui que há elementos de continuidade entre os dois momentos no que se refere ao conceito de inércia, os quais aparecem agora com uma representação analítica desprovida da substância histórica e institucional que o conceito outrora abarcava.
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Table of Contents
LIST OF TABLES ...... 3 LIST OF FIGURES ...... 5 Introduction ...... 7 Chapter 1 – Creeping inflation and indexation: historical aspects of inflation inertia ...... 15 1.2 The changing perception about the significance of inflation ...... 15 1.3 Historical aspects of indexation ...... 19 1.4 The meanings of “inflation inertia” in economics ...... 25 1.5 Inflation Inertia in Brazil: where do we stand? ...... 34 Chapter 2 – Anticipations of the inertial inflation concept ...... 39 2.1 Income distribution models of inflation in the Post war period ...... 39 2.2 The Latin American Structuralism: Structural Rigidity and Inflation ...... 43 2.3 The First Round of the Monetarist Structuralist Controversy ...... 46 2.3.1 Nicholas Kaldor’s interpretation of the Chilean inflation ...... 49 2.3.2 CEPAL and structural inflation ...... 51 2.3.3 Furtado’s view of inflation: institutional and technological inertia ...... 54 2.4 The Furtado Kaldor Pazos Mechanism ...... 57 2.4.1 The discursive representation of the saw tooth pattern of real wages ...... 59 2.4.2 The origins of the general mechanics of the saw tooth diagram ...... 65 Chapter 3 - The rise of mechanical models of inflation ...... 73 3.1 The Mechanics of Inflation ...... 75 3.2 CEPAL goes mathematically formal ...... 87 3.3 Phillips trade