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5
Oct 10
Tue

How fake money saved Brazil

Twenty years ago, Brazil was undergoing a bout of hyperinflation, with prices increasing at the rate of 80% per month. The story behind how they brought this under control is a fascinating one, and it relies less on pulling on the traditional economic levers and more on psychology (which is pretty much behavioural economics).

The four friends set about explaining their idea. You have to slow down the creation of money, they explained. But, just as important, you have to stabilize people’s faith in money itself. People have to be tricked into thinking money will hold its value.

The four economists wanted to create a new currency that was stable, dependable and trustworthy. The only catch: This currency would not be real. No coins, no bills. It was fake.

“We called it a Unit of Real Value — URV,” Bacha says. “It was virtual; it didn’t exist in fact.”

(Hence why Brazil’s currency is today called the Real.)

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