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The Conceptual Evolution of Inflation Inertia in Brazil

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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 2 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 ii 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 iii To my family, in honor of Alzira Rosa Roncaglia (in memoriam) and Joana Cajuela de Carvalho (in memoriam ) iv v 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. vi 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! vii 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. viii ix 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
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