Exchange rate dynamics in Brazil
AbstractThe paper aims to investigate on empirical and theoretical grounds the Brazilian exchange rate dynamics under floatingexchange rates. The empirical analysis examines the short and long term behavior of the exchange rate, interest rate(domestic and foreign) and country risk using econometric techniques such as variance decomposition, Grangercausality, cointegration tests, error correction models, and a GARCH model to estimate the exchange rate volatility. Theempirical findings suggest that one can argue in favor of a certain degree of endogeneity of the exchange rate and thatflexible rates have not been able to insulate the Brazilian economy in the same patterns predicted by literature due to itsown specificities (managed floating with the use of international reserves and domestic interest rates set according toinflation target) and to externally determined variables such as the country risk. Another important outcome is the lackof a closer association of domestic and foreign interest rates since the new exchange regime has been adopted. That is,from January 1999 to May 2004, the US monetary policy has no significant impact on the Brazilian exchange ratedynamics, which has been essentially endogenous primarily when we consider the fiscal dominance expressed by theprobability of default.
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Bibliographic InfoPaper provided by Escola de Economia de São Paulo, Getulio Vargas Foundation (Brazil) in its series Textos para discussão with number 210.
Date of creation: 16 Jun 2010
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Other versions of this item:
- Flávio Vilela Vieira & Márcio Holland, 2004. "Exchange Rate Dynamics In Brazil," Anais do XXXII Encontro Nacional de Economia [Proceedings of the 32th Brazilian Economics Meeting] 066, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
- F31 - International Economics - - International Finance - - - Foreign Exchange
- C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models &bull Diffusion Processes
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-07-03 (All new papers)
- NEP-CBA-2010-07-03 (Central Banking)
- NEP-IFN-2010-07-03 (International Finance)
- NEP-MON-2010-07-03 (Monetary Economics)
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