Lessons of the 2008 crisis

Abstract

In the second semester of 1998, the Brazilian economy was hit by a serious balance of payments crisis. Among the immediate causes of the crisis, one can single out the strong international turbulence generated by the Asian and the Russian crises, which led to a sudden stop in foreign capital inflows to the Brazilian economy. However, the damage caused by the capital flow reversal which followed those crises was amplified by two factors: capital account liberalization, gradually promoted since the late 1980s increased the volatility of the capital account, by making it much easier for financial investors to move their placements in and out of the country; the deliberate overvaluation of the Brazilian currency, pursued in the previous four years, had recreated the classical picture of a balance of payments crisis in developing economies.