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Exchange Rate Volatility and the Fear of Floating in Brazil

  • Márcio Holland

    (FGV-UFU)

Many emerging market economies (EMs) have adopted a floating exchange rate regime after currency crises. Since 1999 Brazil has experienced a floating regime combined with inflation targeting. The Central Bank varies the interest rates in order to reach the targeted inflation rates and consequently the variability of the interest rates has been higher than the variability of the exchange rates. According to some economists, this is a clear symptom of the fear of floating and Brazil can not be an exception among the EMs. After assessing the behavior of the exchange rates and interest rates associated with other macroeconomic variables, this paper concludes that Brazil has not suffered from the fear of floating and that the Brazilian Central Bank does not care about exchange rate dynamics as much as it does about inflation.

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File URL: http://www.anpec.org.br/revista/vol7/vol7n2p279_292.pdf
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Article provided by ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics] in its journal Economia.

Volume (Year): 7 (2006)
Issue (Month): 2 ()
Pages: 279-292

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Handle: RePEc:anp:econom:v:7:y:2006:i:2:p:279-292
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  1. André Minella & Paulo Springer de Freitas & Ilan Goldfajn & Marcelo Kfoury Muinhos, 2002. "Inflation Targeting in Brazil: Lessons and Challenges," Working Papers Series 53, Central Bank of Brazil, Research Department.
  2. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange Rates and Financial Fragility," NBER Working Papers 7418, National Bureau of Economic Research, Inc.
  3. Barry Eichengreen, 2006. "Can Emerging Markets Float? Should They Inflation Target?," Chapters, in: Monetary Integration and Dollarization, chapter 8 Edward Elgar.
  4. Fernando M. Gonçalves & Márcio Holland & Andrei D. Spacov, 2005. "Can Jurisdictional Uncertainty And Capital Controls Explain The High Level Of Real Interest Rates In Brazil? Evidence From Panel Data," Anais do XXXIII Encontro Nacional de Economia [Proceedings of the 33th Brazilian Economics Meeting] 028, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
  5. Stanley Fischer, 2001. "Exchange Rate Regimes: Is the Bipolar View Correct?," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 3-24, Spring.
  6. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fear of Floating," NBER Working Papers 7993, National Bureau of Economic Research, Inc.
  7. Jeffrey A. Frankel & Shang-Jin Wei, 2004. "Managing Macroeconomic Crises," NBER Working Papers 10907, National Bureau of Economic Research, Inc.
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