The threat of fiscal dominance in Brazil

Brazil’s inflation is approaching 10 percent and yet the central bank has opted not to raise interest rates in a meeting on Wednesday. Not only that, it pushed back its target to 2017.

For many, the bank is staying put and tolerating a little more inflation because of the recession, the worst in decades.

But it may be not that simple. In fact, some economists advocate abandoning conventional wisdom to understand Brazil’s crisis. They say the bank may have not raised interest rates from 14.25 percent, already one of the highest in the world, because that would have fueled inflation, instead of cooling it.

Call it a paradox — if you’re too young.

Economic researchers have another name for it, which older Brazilians (and today’s Argentinians) know quite well: fiscal dominance.

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