Today Paul Krugman pointed out that Brazilian monetary policy is hamstrung in a way that Canadian policy is not. Canada can keep interest rates at rock-bottom in the face of falling commodity prices. Brazil can’t. Extensive foreign-currency borrowing by private entities means that a falling real would push Brazilian borrowers into insolvency. Cutting interest rates in Brazil as much as in Canada, however, would cause the real to plummet as investors took flight. So Brazil can’t cut as much as Canada.
I would just like to point out that Brazilian fiscal policy is similarly hamstrung. Canada can (rightfully!) go on a borrowing spree with no ill-effect. Even if it doesn’t prompt a recovery (and I think it will) it will leave Canada with badly-needed shiny new roads and trains. But if Brazil tried the same, investors would run for the hills, causing the real to fall and forcing the central bank to raise interest rates or watch an ugly combination of insolvent companies and soaring inflation make the economy worse.
We mentioned that problem on this blog back in 2008.
(By the way, the conservative government did a pretty good job with countercyclical fiscal policy. Take that, James Nicoll, you hippie.)