IDEAS home Printed from https://ideas.repec.org/a/fgv/epgrbe/v65y2011i1a1402.html
   My bibliography  Save this article

Monetary policy, default risk and the exchange rate in Brazil

Author

Listed:
  • Gonçalves, Carlos Eduardo
  • Guimaraes, Bernardo Guimaraes

Abstract

In a country with high probability of default, higher interest rates may render the currency less attractive if sovereign default is costly. This paper develops that intuition in a simple model and estimates the effect of changes in interest rates on the exchange rate in Brazil using data from the dates surrounding the monetary policy committee meetings and the methodology of identification through heteroskedasticity. Indeed, we find that unexpected increases in interest rates tend to lead the Brazilian currency to depreciate.

Suggested Citation

  • Gonçalves, Carlos Eduardo & Guimaraes, Bernardo Guimaraes, 2011. "Monetary policy, default risk and the exchange rate in Brazil," Revista Brasileira de Economia - RBE, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 65(1), March.
    • Handle: RePEc:fgv:epgrbe:v:65:y:2011:i:1:a:1402
    as

    Download full text from publisher

    File URL: https://periodicos.fgv.br/rbe/article/view/1402
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Caporale, Guglielmo Maria & Cipollini, Andrea & Demetriades, Panicos O., 2005. "Monetary policy and the exchange rate during the Asian crisis: identification through heteroscedasticity," Journal of International Money and Finance, Elsevier, vol. 24(1), pages 39-53, February.
    2. Joel Bogdanski & Alexandre Antonio Tombini & Sergio R. Da C. Werlang, 2001. "Implementing Inflation Targeting in Brazil," Money Affairs, CEMLA, vol. 0(1), pages 1-23, January-J.
    3. Thomas J. Sargent & Neil Wallace, 1984. "Some Unpleasant Monetarist Arithmetic," Palgrave Macmillan Books, in: Brian Griffiths & Geoffrey E. Wood (ed.), Monetarism in the United Kingdom, pages 15-41, Palgrave Macmillan.
    4. Bulow, Jeremy & Rogoff, Kenneth, 1989. "A Constant Recontracting Model of Sovereign Debt," Journal of Political Economy, University of Chicago Press, vol. 97(1), pages 155-178, February.
    5. Daniel Cohen & Jeffrey Sachs, 1991. "Growth and External Debt Under Risk of Debt Repudiation," NBER Chapters, in: International Volatility and Economic Growth: The First Ten Years of The International Seminar on Macroeconomics, pages 437-472, National Bureau of Economic Research, Inc.
    6. Allan Drazen & Paul R. Masson, 1994. "Credibility of Policies Versus Credibility of Policymakers," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 109(3), pages 735-754.
    7. Rigobon, Roberto & Sack, Brian, 2004. "The impact of monetary policy on asset prices," Journal of Monetary Economics, Elsevier, vol. 51(8), pages 1553-1575, November.
    8. Zettelmeyer, Jeromin, 2004. "The impact of monetary policy on the exchange rate: evidence from three small open economies," Journal of Monetary Economics, Elsevier, vol. 51(3), pages 635-652, April.
    9. Dongchul Cho & Kenneth D. West, 2003. "Interest Rates and Exchange Rates in the Korean, Philippine, and Thai Exchange Rate Crises," NBER Chapters, in: Managing Currency Crises in Emerging Markets, pages 11-35, National Bureau of Economic Research, Inc.
    10. Roberto Rigobon, 2003. "Identification Through Heteroskedasticity," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 777-792, November.
    11. Cook, Timothy & Hahn, Thomas, 1989. "The effect of changes in the federal funds rate target on market interest rates in the 1970s," Journal of Monetary Economics, Elsevier, vol. 24(3), pages 331-351, November.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Carlo Rosa & Giovanni Verga, 2006. "The Impact of Central Bank Announcements on Asset Prices in Real Time: Testing the Efficiency of the Euribor Futures Market," CEP Discussion Papers dp0764, Centre for Economic Performance, LSE.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Guimaraes, Bernardo & ,, 2007. "Monetary Policy, Default Risk and the Exchange Rate," CEPR Discussion Papers 6501, C.E.P.R. Discussion Papers.
    2. Xinsheng Lu & Ling Qu & Ying Zhou, 2015. "The Impact of Monetary Surprises on Australian Financial Futures Markets: An Insight into Cash Rate Target Announcements," Australian Economic Papers, Wiley Blackwell, vol. 54(3), pages 151-166, September.
    3. repec:aut:wpaper:201301 is not listed on IDEAS
    4. Bernoth, Kerstin & Herwartz, Helmut, 2021. "Exchange rates, foreign currency exposure and sovereign risk," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 117, pages 1-1.
    5. Pablo Ottonello & Wenting Song, 2022. "Financial Intermediaries and the Macroeconomy: Evidence from a High-Frequency Identification," Staff Working Papers 22-24, Bank of Canada.
    6. Anna Pavlova & Roberto Rigobon, 2007. "Asset Prices and Exchange Rates," The Review of Financial Studies, Society for Financial Studies, vol. 20(4), pages 1139-1180.
    7. Zulkefly Abdul Karim & Mohd Azlan Shah Zaidi, 2015. "Monetary Policy, Firm Size and Equity Returns in An Emerging Market: Panel Evidence of Malaysia," Asian Academy of Management Journal of Accounting and Finance (AAMJAF), Penerbit Universiti Sains Malaysia, vol. 11(2), pages 29-55.
    8. Cyril May & Greg Farrell & Jannie Rossouw, 2018. "Do Monetary Policy Announcements Affect Exchange Rate Returns and Volatility of Returns? Some Evidence from High‐Frequency Intra‐Day South African Data," South African Journal of Economics, Economic Society of South Africa, vol. 86(3), pages 308-338, September.
    9. Sylvester C. W. Eijffinger & Benedikt Goderis, 2008. "The Effect of Monetary Policy on Exchange Rates during Currency Crises: the Role of Debt, Institutions, and Financial Openness," Review of International Economics, Wiley Blackwell, vol. 16(3), pages 559-575, August.
    10. Martin T. Bohl & Pierre L. Siklos & David Sondermann, 2008. "European Stock Markets and the ECB's Monetary Policy Surprises," International Finance, Wiley Blackwell, vol. 11(2), pages 117-130, August.
    11. Lee, Ha Yan & Ricci, Luca Antonio & Rigobon, Roberto, 2004. "Once again, is openness good for growth?," Journal of Development Economics, Elsevier, vol. 75(2), pages 451-472, December.
    12. Jung, Alexander, 2023. "Are monetary policy shocks causal to bank health? Evidence from the euro area," Journal of Macroeconomics, Elsevier, vol. 75(C).
    13. Abdul Karim, Zulkefly & Zaidi, Mohd Azlan Shah & Karim, Bakri, 2011. "Does Firm-Level Equity Return Respond to Domestic and International Monetary Policy Shocks? A Panel Data Study of Malaysia," Jurnal Ekonomi Malaysia, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, vol. 45, pages 21-31.
    14. Emanuele Bacchiocchi, 2017. "On the Identification of Interdependence and Contagion of Financial Crises," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 79(6), pages 1148-1175, December.
    15. Eda Gulsen & Ibrahim Burak Kanli & Neslihan Kaya, 2010. "Kuresel Kriz Doneminde TCMB’nin Faiz Kararlarinin Kur Uzerindeki Etkisine Dair Bir Analiz," CBT Research Notes in Economics 1011, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    16. Alexander Jung & Patrick Kuehl, 2021. "Can central bank communication help to stabilise inflation expectations?," Scottish Journal of Political Economy, Scottish Economic Society, vol. 68(3), pages 298-321, July.
    17. Emi Nakamura & Jón Steinsson, 2018. "High-Frequency Identification of Monetary Non-Neutrality: The Information Effect," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 133(3), pages 1283-1330.
    18. Erdoğan, Seyfettin & Karacan, Rıdvan & Alpaslan, Barış, 2013. "Interest Rates, Exchange Rates and Macroeconomic Performance," MPRA Paper 50838, University Library of Munich, Germany.
    19. Emanuele BACCHIOCCHI, 2011. "Identification through heteroskedasticity: a likelihood-based approach," Departmental Working Papers 2011-19, Department of Economics, Management and Quantitative Methods at Università degli Studi di Milano.
    20. Caporin, Massimiliano & Pelizzon, Loriana & Plazzi, Alberto, 2020. "Does monetary policy impact international market co-movements?," SAFE Working Paper Series 276, Leibniz Institute for Financial Research SAFE.
    21. Nathan Foley-Fisher & Bernardo Guimaraes, 2013. "U.S. Real Interest Rates and Default Risk in Emerging Economies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(5), pages 967-975, August.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fgv:epgrbe:v:65:y:2011:i:1:a:1402. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Núcleo de Computação da FGV EPGE (email available below). General contact details of provider: https://edirc.repec.org/data/epgvfbr.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.