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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 Schönerward da Silva
  • Matías Vernengo

Abstract

This paper argues that the pass-through in Brazil has fallen compared with estimates in other studies on 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 suggests 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

Paper provided by University of Utah, Department of Economics in its series Working Paper Series, Department of Economics, University of Utah with number 2008_11.

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Length: 27 pages
Date of creation: 2008
Date of revision:
Publication status: Published in International Journal of Political Economy, 37.4: 64-79.
Handle: RePEc:uta:papers:2008_11

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Keywords: Pass-Through; Inflation; Brazil;

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References

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  1. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear Of Floating," The Quarterly Journal of Economics, MIT Press, vol. 117(2), pages 379-408, May.
  2. Jeffrey Frankel & David Parsley & Shang-Jin Wei, 2012. "Slow Pass-through Around the World: A New Import for Developing Countries?," Open Economies Review, Springer, vol. 23(2), pages 213-251, April.
  3. Ricardo Hausmann & Ugo Panizza & Ernesto H. Stein, 2000. "Why Do Countries Float the Way They Float?," Research Department Publications 4205, Inter-American Development Bank, Research Department.
  4. Sven W. Arndt & J. David Richardson, 1988. "Real-Financial Linkages Among Open Economies," NBER Working Papers 2230, National Bureau of Economic Research, Inc.
  5. 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.
  6. Bateman, Bradley W., 1987. "Keynes's Changing Conception of Probability," Economics and Philosophy, Cambridge University Press, vol. 3(01), pages 97-119, April.
  7. 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.
  8. repec:fth:inadeb:418 is not listed on IDEAS
  9. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange Rates and Financial Fragility," NBER Working Papers 7418, National Bureau of Economic Research, Inc.
  10. 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.
  11. Agnes Belaisch, 2003. "Exchange Rate Pass-Through in Brazil," IMF Working Papers 03/141, International Monetary Fund.
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Citations

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Cited by:
  1. 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].
  2. 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.

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