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Exchange Rate Movements and Monetary Policy In Brazil: Econometric and Simulation Evidence

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  • Furlani, Luiz G. C.
  • Portugal, Marcelo S.
  • Laurini, Márcio P.

Abstract

The literature on monetary economy has aroused growing interest in macroeconomics. Due to computational advancements, models have become increasingly more complex and accurate, allowing for an in-depth analysis of the relationships between real economic variables and nominal variables. Therefore, using a dynamic stochastic general equilibrium (DSGE) model, based on Gali and Monacelli (2005), we propose and estimate a model for the Brazilian economy by employing Bayesian methods so as to assess whether the Central Bank of Brazil takes exchange rate fluctuations into account in the conduct of monetary policy. The most striking result of the present study is that the Central Bank of Brazil does not directly change the interest rate path due to exchange rate movements. A simulation exercise is also used. Our conclusion is that the economy quickly accommodates shocks induced separately on the exchange rate, on the terms of trade, interest rate, and global inflation.

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Paper provided by Insper Working Paper, Insper Instituto de Ensino e Pesquisa in its series Insper Working Papers with number wpe_124.

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Date of creation: Oct 2008
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Handle: RePEc:ibm:ibmecp:wpe_124

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Cited by:
  1. Luis A.V. Catão & Adrian Pagan, 2011. "The Credit Channel and Monetary Transmission in Brazil and Chile: A Structured VAR Approach," Central Banking, Analysis, and Economic Policies Book Series, in: Luis Felipe Céspedes & Roberto Chang & Diego Saravia (ed.), Monetary Policy under Financial Turbulence, edition 1, volume 16, chapter 5, pages 105-144 Central Bank of Chile.
  2. Codruţa Mare & Cristian Litan, 2012. "Perspectives on Euro introduction in the Romanian economy," Baltic Journal of Economics, Baltic International Centre for Economic Policy Studies, vol. 12(1), pages 23-40, July.

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