What if Brazil Hadn't Floated the Real in 1999?

We estimate a dynamic, stochastic general equilibrium model  for the Brazilian economy taking into account  the transition from a currency  peg to inflation  targeting that took place  in 1999. The estimated model exhibits quite different dynamic under the two monetary regimes. We use it to the produce counterfactual histories of  the transition from one regime to another, given estimated history of structural  shocks. Our results  suggest that the maintaining the currency peg would have been too costly, as interest  rates  would have  had  to remain at extremely high levels for several quarters, and  GDP  would  have  collapsed. Accelerating e the pace of nominal  exchange rate  devaluations  after  de  Asian Crisis would have lead to  higher inflation and  interest rates, and slightly lower GDP. Finally, the  first half of 1998 arguably provided a window of opportunity for a smooth transition between the two monetary regimes.