Business Case Studies & Business Publications

Brazilian Stagflation

Murphy, Daniel

Case

Brazilian Stagflation

Murphy, Daniel

GEM-0145 | Published October 4, 2017 | 11 pages Case

Collection: Darden School of Business

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Product Details

Alexandre Tombini, the governor of the Central Bank of Brazil, faced a difficult situation in July 2015. Inflation was in the double digits, well above the target rate of 4.5%, and unemployment had increased from around 4.5% a year prior to nearly 8%. Any actions Tombini took to control inflation would most likely exacerbate unemployment, at least in the short run. To further complicate matters, Tombini’s office was not independent of the executive branch of Brazil’s government, and Tombini faced the possibility that any of his actions that were not aligned with the priorities of the current administration could cost him his job. This case follows classes on fiscal and monetary policy in normal times and is the first class in a sequence on macroeconomic challenges–in this case, stagflation–high inflation and high unemployment. Students are pushed to consider why macroeconomic stabilization involves such acute and unpleasant tradeoffs during episodes of high inflation and unemployment. Students use the IS/LM AD/AS model as a reference.

The learning objectives for the class include: (a) expansionary fiscal and monetary policy can increase inflation; (b) high inflation can be self-perpetuating as households and firms update their inflation expectations; and (c) rising costs (arising from high import prices, for example) tend to be associated with a recession, either contemporaneously if the central bank moves quickly to fight inflation or in the future if it allows inflation to persist.