Overcoming the ‘impossible trinity’
This chapter has three main objectives. First, it supports the view that, despite recognizing that the policy space for assuring both internal and external stability is sharply reduced when 'balance of payments dominance' prevails in some open emerging economies. Second, the chapter argues that the current agenda of Brazilian policymakers should include not only the pursuit of exchange rate stability, but also the targeting of the so-called long-term 'optimal' real exchange rate an original concept that was introduced by two other academic colleagues. Third, the main economic policy implication, instead of a narrow macroeconomic policy like that which prevailed throughout the 2000s in Brazil, policymakers should urgently mirror the most successful Asian countries and adopt a mix of short- and long-term economic policy instruments in order both to avoid 'balance of payments dominance' and to assure sustainable long-term economic growth.