The 1990s crisis in emerging markets: the case of Brazil
In the mid 1990s, the combination of Brazil's tight monetary policy and declining primary fiscal balance led to a swelling stock of the net public debt. The net public debt increased from 20 per cent of GDP in December 1994 to 44 per cent of GDP in December 1998. Real interest rates remained extremely high during this period. Between 1994 and 1998, the average ex-post passive real interest rate was 23 percent per year. Monetary policy kept real interest rates high for two reasons: to safeguard the stability created by the exchange rate based Real Plan and to maintain a difference between the domestic and foreign interest rates that would attract foreign capital in order to finance a rising current account deficit. By 1998, concerns about Brazil's policy mix were growing and investors were not surprised by the collapse of the real in February 1999.