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October 7, 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.

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).

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