Liberty Street Economics

« How Well Do Financial Markets Separate News from Noise? Evidence from an Internet Blooper | Main | Did the Fed’s Term Auction Facility Work? »

October 07, 2011

Historical Echoes: When Virtual Money Saved the Day

New York Fed Research Library

In 1993, a plan hatched by four former economics grad school students helped rescue Brazil from a fifty-year inflationary spiral after all other attempts had failed. Their key idea was to create a virtual currency with a stable value—even though it had no bills, coins, or status as legal tender. Amazingly, this monetary fiction helped an entire nation of consumers and producers act in a manner that put Brazil on a firmer path to economic growth.

    The fake money helped people transition away from high-inflation behaviors (such as demanding high interest rates) to low-inflation expectations and patterns. Once Brazilians learned to trust the stable virtual money, the government was able to more easily introduce a stable actual currency.

    The events are recounted in an NPR story and podcast. (Note that the podcast starts with an unrelated five-minute discussion of the Troubled Asset Relief Program.) The segment includes interviews with Brazilians who describe the challenges of living with high inflation and with two of the economists responsible for the plan. The four Brazilian economists—Edmar Bacha, André Lara-Resende, João Sayad, and Persio Arida—are now considered national heroes.


Disclaimer
The views expressed in this post are those of the author(s) and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author(s).
Posted by Blog Author at 10:00:00 AM in Historical Echoes
About the Blog
Liberty Street Economics features insight and analysis from economists working at the intersection of research and Fed policymaking.

The views expressed are those of the authors, and do not necessarily reflect the position of the New York Fed or the Federal Reserve System.

Upcoming Posts
Useful Links
Feedback & Custom Guidelines
Liberty Street Economics invites you to comment on a post.
Comment Guidelines
We encourage you to submit comments, queries and suggestions on our blog entries. We will post them below the entry, subject to the following guidelines:
Please be brief: Comments are limited to 1500 characters.
Please be quick: Comments submitted more than 1 week after the blog entry appears will not be posted.
Please try to submit before COB on Friday: Comments submitted after that will not be posted until Monday morning.
Please be on-topic and patient: Comments are moderated and will not appear until they have been reviewed to ensure that they are substantive and clearly related to the topic of the post. The moderator will not post comments that are abusive, harassing, or threatening; obscene or vulgar; or commercial in nature; as well as comments that constitute a personal attack.  We reserve the right not to post a comment; no notice will be given regarding whether a submission will or will not be posted.
Archives