ABSTRACT
This chapter analyses the relationship between exchange rate policy and economic performance in the environment of financial liberalization in Brazil. According to Prasad, the potential benefits of financial liberalization for emerging market countries can be divided into direct and indirect channels. Financial liberalization results in market discipline that stimulates more consistent macroeconomic policy as market forces can penalize bad policies. The process of financial liberalization in Brazil started cautiously in the late 1980s, when the international financial market was practically closed to emerging countries because of the foreign debt crisis. Furthermore, empirical studies in general have found no robust evidence that financial liberalization has boosted economic growth in developing economies. A number of recent works have empirically evaluated the relationship among financial liberalization, economic performance and macroeconomic stability in Brazil. Since the end of the 1980s an increasing trend towards capital account liberalization has been evident in Brazil.
