Vinicius Torres Freire argues that a monetary and fiscal plan associated with economist André Lara Resende would face serious difficulties even before implementation. The debate intensified after reports that President Luiz Inácio Lula da Silva would hear Resende’s ideas, prompting a heated discussion online over economic policy and the role of “the market.”

Resende’s proposal, as outlined in a September article, would place monetary and fiscal policy under a council that set targets for public finances, inflation and interest rates over four- or five-year periods. Freire says the plan goes beyond this framework, but focuses on these elements to explain why he believes it would struggle.

In Freire’s assessment, the prospect of the plan—or a similar version—could lead investors to expect a weaker real, higher inflation and rising long-term interest rates. Banks, investment funds, insurers, pension funds and other savers might move away from assets denominated in reais, particularly if expected returns were low and the risk of lending to the government increased.

The columnist says that, once in place, the proposed framework might rely on the Central Bank selling foreign currency from its reserves to limit the real’s depreciation. But he argues that maintaining an exchange-rate target through repeated interventions would deplete reserves and could increase concerns about the country’s risk. In an economy without capital-flow controls, he adds, authorities cannot simultaneously fix nominal interest rates and stabilize the exchange rate.

Freire warns that diminishing reserves could encourage further pressure on the currency, while a sharp external shock might trigger a crisis or speculative attack. He also says the resulting uncertainty could make it harder for the government to finance deficits or refinance debt over longer periods, potentially harming investment, employment and real wages.

The columnist adds that price controls or restrictions on capital flows might be proposed to address rising inflation and pressure on the exchange rate, but argues that such measures have failed in other Latin American countries. He says supporters of the plan have not explained how they would respond to this potential chain of problems.

Freire also questions the institutional changes the proposal could require. A Fiscal and Monetary Council with authority to set targets might have powers beyond those of the elected government, potentially requiring changes to laws governing the Central Bank and the National Treasury. He describes such a shift as a political and institutional revolution, rather than a minor adjustment to conventional monetary policy.

Sources: Folha Mercado.