After struggling to reach the targets in the early years, the Central Bank has managed to keep inflation within the targeted range (since 2005 at 4.5% plus or minus two percentage points) for 5 years in a row. In fact, last year, when global inflationary pressures were quite strong (at least until the third quarter), the BCB was one of the few monetary authorities, within the set of those formally targeting inflation, not to miss its target, even though economic activity, until the end of the third quarter, remained quite strong. Thus, from a narrow balance of payments viewpoint, as well as from a macroeconomic stance, the floating BRL has been remarkably successful. BIS Review 8/2009  1  That has not meant that the regime has counted with unqualified support. Time and again criticism of the floating BRL has mounted, be it because the currency is seen as not floating enough, or floating too much, or being too weak, or too strong, or helping some sectors of the economy or regions of the country at the expense of others. More fundamental is the criticism that the exchange rate is too important to be left to the markets. The recent financial crisis and misdemeanors have made this position fashionable again in mature economies. In Brazil, with a long tradition of heavy state intervention in the economy, which was characterized by close linkages between a few privileged segments and the government, this position has always had, and still has, its vocal advocates in all sorts of media.
The first point to acknowledge, which the opponents of the floating BRL often seem to forget, is that regardless of the exchange rate regime, the real effective exchange rate always floats. Or, putting another way, the relative price of tradeables to nontradeables changes continually. Thus, the relative prices that are relevant for production and consumption decisions for exporters, importers, households and enterprises always adjust, whether the nominal exchange rate is fixed by a group of, hopefully enlightened, civil servants, or set by the markets. But when the exchange rate is allowed to float, relative price adjustment tends to be faster, and the impact of external shocks on quantities, that is to say on income and employment, tends to be smaller than when the nominal exchange rate is fixed. The second point to highlight is that even controlling the nominal exchange rate can be a challenge, and comes at the cost of either the ability to pursue an independent monetary policy or of free capital flows. Countries cannot elude this constraint: nominal exchange rate management requires either severing linkages between the home economy and international capital markets, or shadowing some other country’s monetary policy. In sum, adopting a workable nominal exchange rate target (be it explicit or hidden, for the level or the path) imposes macroeconomic choices that fewer and fewer countries have been willing to make. It is somewhat heroic to assume that the State would be extremely competent at setting the nominal exchange rate.