The macroeconomic tripod is a way of describing three different measures that form a support for the balance of the economy.
These three measures arise from different economic policies: Monetary, Fiscal and Foreign Exchange Policy. Of these, the tripod is formed by strategies to control inflation, control public spending and the floating exchange rate, respectively.
While the Central Bank follows inflation targets and keeps the exchange rate free to take market values in dollars, the government must ensure control of spending by setting fiscal targets.
For the defenders of these measures, maintaining well-established goals allows the country to continue on a path of economic growth and stability.
How is the macroeconomic tripod formed?
The macroeconomic tripod is composed of goals that control inflation through interest rates, with a floating exchange rate regime and fiscal responsibility.
These goals together demonstrate more clearly the objectives that the government has regarding the economic policies that it must take.
Inflation has annual targets that are followed by the Central Bank every year. In order to have this control, the Central Bank’s Monetary Policy Committee (Copom) defines the interest rate that makes it possible to reach the target in the economy.
This measure is done so that inflation is stabilized between periods of recession, when it tends to be lower, and growth, when it tends to rise.
The exchange rate is fluctuating when the exchange rate changes freely according to the supply and demand for reais. For example, an increase in demand for dollars causes the real to decrease in value against the US currency.
The Central Bank intervenes in the foreign exchange market only in cases where the real is threatened with high volatility.
A floating exchange rate regime allows the balance of payments to be balanced, while the institution has more independence in setting the interest rate.
Both the inflation targets and the floating exchange rate regime started to be defined in 1999. Previously, Brazil adopted a regime of exchange bands, when the exchange rate was practically fixed with the dollar.
The measure that complements the tripod comes from the government, which must set goals on how much to collect and spend during the year.
The ideal result happens with the primary surplus, when the government spends less than it collects, in this case not considering the debt interest expenses. The target can also predict a deficit, with expenses greater than revenues.
In the end, the important thing is to indicate that the target has been met and that the government is able to give credibility in reaching the established target.
How the macroeconomic tripod came about
This expression emerged during the beginning of the second government of President Fernando Henrique Cardoso, in 1999.
This year he was appointed as president of the Central Bank, Armínio Fraga, an economist who was responsible for the idea and practice of the tripod measures.
Until that time, Brazil adopted a fixed exchange rate regime with the dollar, which became unsustainable due to the intense demand for dollars.
The emergence of the macroeconomic tripod suggested the move to the floating exchange rate regime, and the devaluation of the Brazilian currency, without neglecting the concern to have a well-controlled inflation.