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The Decline of the Exchange Rate Pass-Through in Brazil: Explaining the "Fear of Floating"

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  • Carlos Eduardo Schönerwald da Silva
  • Matías Vernengo

Abstract

This paper argues that the pass-through in Brazil has fallen compared with estimates in other studies done for earlier time periods, and remains low. Whereas pass-through effects where high and close to 1 in the high-inflation period, they seem to have fallen to around 0.2 after the Real Plan stabilization, a number that is similar to the Import Substitution Industrialization (ISI) period of the 1950s and 1960s. Conventional results suggest that low and stable inflation environments lead to low levels of exchange rate pass-through and thus contribute to weakening the ‘fear of floating’ phenomenon experienced by some developing countries. In spite of lower pass-through effects, the Brazilian Central Bank has maintained high interest rates in order to control the exchange rate. This paper suggests that ‘fear of inflation’ provides justification for the central bank's persistent ‘fear of floating.’

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Bibliographic Info

Article provided by M.E. Sharpe, Inc. in its journal International Journal of Political Economy.

Volume (Year): 37 (2008)
Issue (Month): 4 (December)
Pages: 64-79

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Handle: RePEc:mes:ijpoec:v:37:y:2008:i:4:p:64-79

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Web page: http://mesharpe.metapress.com/link.asp?target=journal&id=110909

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Keywords: Brazil; inflation; pass-through;

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References

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  1. repec:fth:inadeb:418 is not listed on IDEAS
  2. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear Of Floating," The Quarterly Journal of Economics, MIT Press, vol. 117(2), pages 379-408, May.
  3. Armando Baqueiro & Alejandro Diaz de Leon & Alberto Torres, 2003. "Fear of floating or fear of inflation? The role of the exchange rate pass-through," BIS Papers chapters, in: Bank for International Settlements (ed.), Monetary policy in a changing environment, volume 19, pages 338-354 Bank for International Settlements.
  4. Bateman, Bradley W., 1987. "Keynes's Changing Conception of Probability," Economics and Philosophy, Cambridge University Press, vol. 3(01), pages 97-119, April.
  5. Ricardo Hausmann & Ugo Panizza & Ernesto H. Stein, 2000. "Why Do Countries Float the Way They Float?," IDB Publications 6467, Inter-American Development Bank.
  6. Ricardo Hausmann & Michael Gavin & Carmen Pagés-Serra & Ernesto H. Stein, 1999. "Financial Turmoil and Choice of Exchange Rate Regime," Research Department Publications 4170, Inter-American Development Bank, Research Department.
  7. Sven W. Arndt & J. David Richardson, 1987. "Real-Financial Linkages Among Open Economies," NBER Working Papers 2230, National Bureau of Economic Research, Inc.
  8. Agnes Belaisch, 2003. "Exchange Rate Pass-Through in Brazil," IMF Working Papers 03/141, International Monetary Fund.
  9. Frankel, Jeffrey & Parsley, David & Wei, Shang-Jin, 2005. "Slow Passthrough Around the World: A New Import for Developing Countries?," Working Paper Series rwp05-016, Harvard University, John F. Kennedy School of Government.
  10. Taylor, John B., 2000. "Low inflation, pass-through, and the pricing power of firms," European Economic Review, Elsevier, vol. 44(7), pages 1389-1408, June.
  11. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange Rates and Financial Fragility," NBER Working Papers 7418, National Bureau of Economic Research, Inc.
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Cited by:
  1. André Nassif & Carmem Feijó & Eliane Araújo, 2011. "The trend of the real exchange rate overvaluation in open emerging economies: the case of Brazil," Working Papers 0111, Universidade Federal do Paraná, Department of Economics.
  2. André Nassif & Carmem Feijó & Marco Antônio Silveira De Almeida, 2011. "Why Does Real Exchange Rate Overvalue Inbrazil? Theoretical Determinants, Empirical Evidence And Economicpolicy Dilemmas," Anais do XXXVIII Encontro Nacional de Economia [Proceedings of the 38th Brazilian Economics Meeting] 237, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
  3. Carmem Aparecida Feijo & Luiz Fernando Cerqueira, 2013. "Econometric Evidence on the Determinants of the Mark Up of Industrial Brazilian Firms in the 1990s," Economia, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics], vol. 14(1a), pages . 91_119.

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