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The Decline of the Exchange Rate Pass-Through in Brazil: Explaining the "Fear of Floating"

  • Carlos Eduardo Schönerwald da Silva
  • Matías Vernengo

This paper argues that the pass-through in Brazil has fallen compared with estimates in other studies done for 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 suggest 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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Article provided by M.E. Sharpe, Inc. in its journal International Journal of Political Economy.

Volume (Year): 37 (2008)
Issue (Month): 4 (December)
Pages: 64-79

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Handle: RePEc:mes:ijpoec:v:37:y:2008:i:4:p:64-79
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  1. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fear of Floating," NBER Working Papers 7993, National Bureau of Economic Research, Inc.
  2. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange Rates and Financial Fragility," NBER Working Papers 7418, National Bureau of Economic Research, Inc.
  3. Frankel, Jeffrey & Parsley, David & Wei, Shang-Jin, 2005. "Slow Passthrough Around the World: A New Import for Developing Countries?," Working Paper Series rwp05-016, Harvard University, John F. Kennedy School of Government.
  4. 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.
  5. Bateman, Bradley W., 1987. "Keynes's Changing Conception of Probability," Economics and Philosophy, Cambridge University Press, vol. 3(01), pages 97-119, April.
  6. 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.
  7. 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.
  8. Sven W. Arndt & J. David Richardson, 1987. "Real-Financial Linkages Among Open Economies," NBER Working Papers 2230, National Bureau of Economic Research, Inc.
  9. 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.
  10. Agnes Belaisch, 2003. "Exchange Rate Pass-Through in Brazil," IMF Working Papers 03/141, International Monetary Fund.
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