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

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  • Luiz Gustavo Cassilatti Furlani
  • Marcelo Savino Portugal
  • Márcio Poletti Laurini

Abstract

The literature on monetary economy has aroused growing interest in macroeconomics. Due to computational advancements, models have been increasingly more complex and accurate, allowing for the 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, on the interest rate, and on global inflation.

Suggested Citation

  • Luiz Gustavo Cassilatti Furlani & Marcelo Savino Portugal & Márcio Poletti Laurini, 2008. "Exchange Rate Movements and Monetary Policy In Brazil: Econometric and Simulation Evidence," Business and Economics Working Papers 013, Unidade de Negocios e Economia, Insper.
    • Handle: RePEc:aap:wpaper:013
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    Cited by:

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    2. Fernandes, Leonardo H.S. & Araújo, Fernando H.A. & Silva, Igor E.M. & Leite, Urbanno P.S. & de Lima, Neílson F. & Stosic, Tatijana & Ferreira, Tiago A.E., 2020. "Multifractal behavior in the dynamics of Brazilian inflation indices," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 550(C).
    3. Gabriela Bezerra De Medeiros & Marcelo Savino Portugal & Edilean Kleber Da Silva Bejarano Aragon, 2016. "Endogeneity And Nonlinearities In Central Bank Of Brazil’S Reaction Functions: An Inverse Quantile Regression Approach," Anais do XLIII Encontro Nacional de Economia [Proceedings of the 43rd Brazilian Economics Meeting] 061, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    4. Bui Thanh Trung, 2022. "Measuring Monetary Policy in Emerging Economy: The Role of Monetary Condition Index," Journal of Economics / Ekonomicky casopis, Institute of Economic Research, Slovak Academy of Sciences, vol. 70(6), pages 499-522, June.
    5. Buffie, Edward F. & Airaudo, M. & Zanna, Felipe, 2018. "Inflation targeting and exchange rate management in less developed countries," Journal of International Money and Finance, Elsevier, vol. 81(C), pages 159-184.
    6. Mr. Marco Airaudo & Mr. Edward F Buffie & Luis-Felipe Zanna, 2016. "Inflation Targeting and Exchange Rate Management In Less Developed Countries," IMF Working Papers 2016/055, International Monetary Fund.
    7. Bui Trung Thanh, 2024. "Foreign exchange interventions and monetary policy: evidence from emerging economies," Review of Economic Perspectives, Sciendo, vol. 24(2-3), pages 71-89.
    8. Gabriela Bezerra Medeiros & Marcelo Savino Portugal & Edilean Kleber da Silva Bejarano Aragón, 2017. "Endogeneity and nonlinearities in Central Bank of Brazil’s reaction functions: an inverse quantile regression approach," Empirical Economics, Springer, vol. 53(4), pages 1503-1527, December.
    9. Ricardo Ramalhete MOREIRA, 2015. "Reviewing Taylor rules for Brazil: was there a turning-point?," Journal of Economics and Political Economy, KSP Journals, vol. 2(2), pages 276-289, June.
    10. Cortes, Gustavo S. & Paiva, Claudio A.C., 2017. "Deconstructing credibility: The breaking of monetary policy rules in Brazil," Journal of International Money and Finance, Elsevier, vol. 74(C), pages 31-52.
    11. Montes, Gabriel Caldas & Ferreira, Caio Ferrari, 2020. "Does monetary policy credibility mitigate the fear of floating?," Economic Modelling, Elsevier, vol. 84(C), pages 76-87.
    12. Bui Trung Thanh & Gábor Kiss Dávid, 2021. "Measuring monetary policy by money supply and interest rate: evidence from emerging economies," Review of Economic Perspectives, Sciendo, vol. 21(3), pages 347-367, September.

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