1 Inflation and Economic Growth in an Open Developing Country: The Case of Brazil Carolina Troncoso Baltar * 1. Introduction Brazil passed through a long period of high inflation due to the external debt crisis in the 1980s. Despite several stabilization plans, inflation remained high. In 1994, Brazilian domestic inflation was reduced after opening trade and financial markets and implementing the Real Plan, thanks to an international context favourable to capital inflow into Brazil. Since then, Brazilian inflation has been relatively low. However, the Brazilian performance (both GDP growth and inflation) became more dependent on international trade and finance after the liberalising reforms. This paper studies the relationship between tradable and non-tradable goods inflation, GDP growth, domestic inflation and international inflation measured in domestic currency in Brazil after trade and financial liberalisation. The links between economic activity and the price level of goods and services are complex (Arestis and Sawyer, 2005a): a better comprehension should consider how nominal wages and mark-ups are related to the economic activity and how both, together with the exchange rate, affect the level of domestic price. In an open developing economy, 1 tradable goods should be distinguished from non- tradable goods. Studying economic growth, on the one hand, and tradable and non-tradable goods’ inflation, on the other hand, show the importance of the nominal exchange rate. This paper discusses all these relationships formally, complementing the previous works that relate the nominal exchange rate and inflation in Brazil such as Carneiro (2002), Farhi (2006), Braga (2010), Serrano (2010) and Prates et al. (2009). The paper is organized in six sections including this introduction. Section two presents some stylised facts for the Brazilian economy that raises questions on the relationship between inflation and economic growth. Section three reviews the literature on the * Post-doctoral researcher at the State University of Campinas (Unicamp). The author is very grateful to Philip Arestis, Gilberto Tadeu Lima and Daniela Prates for their comments and to “Coordenação de Aperfeiçoamento de Pessoal de Nível Superior” (CAPES) for financial support (PhD scholarship).