Inflation and Unemployment in Brazil

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Inflation and Unemployment in Brazil
In this section we will analyse Brazilian inflation and unemployment historical patterns in order to make prediction about their likely future behaviour in the short term; we will then see how this contributes to our investing decision. The country has experienced historically high levels of inflation, mainly due to a combination of large GDP growth (average of 10% during the 1960’s) and wrong policy measures such as the 1978 shift in nominal wage adjustment from 12 to 6 months led to inflation values as high as 2,477.15%. Our period of interest displays more normal figures, a consequence of tight corrective policies implemented from 1994 onwards (which we will describe below???). The relationship between Inflation and Unemployment is plotted in the graph above. In 2000 inflation met the predetermined target of 6%. An internal energy crisis in 2001, caused by low levels in hydroelectric plants and lack of long-term investment in energy, resulted in the target rate (4%) being passed by almost 100%. Nevertheless, the theoretically assumed negative relationship between inflation and unemployment seems to hold. The successive data reflect the huge supply shock caused by the combined effect of numerous factors: the Argentinean economic crisis, which negatively affected Brazil as its main trading partner, large fiscal and current account problems and the increase in government bonds’ spread around the world. Furthermore, the political elections in the same year were a reason of strong uncertainty, due to fears that the likely winner, the leftish Luiz Ignacio Lula da Silva, would have adopted less market-friendly policies caused huge capital outflows from the country, amounting to as much as 6% of GDP. This caused a general economic unrest, with unemployment skyrocketing to 12.53% and inflation to 12.30%. Let us use this brief analysis of inflation and unemployment to illustrate some points about an investment aimed at the...
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