ABSTRACT
Brazil has experienced double-digit inflation. The confusion in Brazil was fueled by inflation that gave no sign of decreasing; in 1984 it reached almost 230 percent. By attributing the principal factor in an inertial inflation to the legality of indexed contracts, specialists accept an overly institutionalized view of the Brazilian economy. Recognition of the inadequacy of the proposals has frustrated the majority of Brazilian economic analysts. However, our understanding of the nature of inertial inflation and indexation pointed to a way out of this frustrating impasse. Our proposal is based on the following premises regarding the conditions of the Brazilian economy: Monetary reform is not a substitute for policy measures that attack the foundations of inflation. In addition to the elimination of inertial inflation, monetary reform provides an unintended gain in seigniorage to the government. A trustworthy move in economic policy, however, can suspend inertial inflation only under specific circumstances.
