THE CASE FOR FLOATING EXCHANGE RATES IN A TRANSITION PHASE

Abstract

This article seeks to discuss questions related to exchange rate policy in the context of a transition from a high inflation situation, such as the one experienced by the Brazilian economy in recent years, to a regime of price stability. It is argued that the rising inflation in the 80s led to an exhaustion of the mini-devaluation system. The huge problems associated with the setting of the exchange rate are discussed. It is concluded that, although the freely floating exchange rate system is not a desirable alternative for the long run, a regime of managed floating exchange rates does constitute the least troublesome one in the context of the transition to price stability.