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Long-Run Determinants of the Brazilian Real: a closer look at commodities

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  • Emanuel Kohlscheen

Abstract

We use cointegration analysis to show that the long-run behavior of the Brazilian real effective exchange rate betweeen January 1999 and September 2012 can largely be explained by the price variation of a basket of five commodities - that accounted for 51% of Brazilian export revenues in 2011. We estimate that a 25% real variation in the price of these five commodities moves the fundamental long-run real exchange rate by about 10%. Changes in interest rate differentials do not explain short or long term movements in the exchange rate during this period. Furthermore, we find that deviations of the real effective exchange rate from the long run equilibrium level have an estimated half-life of approximately 8 months. The growing exports of oil & fuel and of iron ores, as well as the important oil discoveries in the pre-salt layer, suggest that commodity prices will continue to influence the value of the Real in future.

Suggested Citation

  • Emanuel Kohlscheen, 2013. "Long-Run Determinants of the Brazilian Real: a closer look at commodities," Working Papers Series 314, Central Bank of Brazil, Research Department.
  • Handle: RePEc:bcb:wpaper:314
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    1. Jaromir Benes & Andrew Berg & Rafael Portillo & David Vavra, 2015. "Modeling Sterilized Interventions and Balance Sheet Effects of Monetary Policy in a New-Keynesian Framework," Open Economies Review, Springer, vol. 26(1), pages 81-108, February.
    2. Gregory, Allan W. & Hansen, Bruce E., 1996. "Residual-based tests for cointegration in models with regime shifts," Journal of Econometrics, Elsevier, vol. 70(1), pages 99-126, January.
    3. Kohlscheen, Emanuel, 2010. "Emerging floaters: Pass-throughs and (some) new commodity currencies," Journal of International Money and Finance, Elsevier, vol. 29(8), pages 1580-1595, December.
    4. Cashin, Paul & Cespedes, Luis F. & Sahay, Ratna, 2004. "Commodity currencies and the real exchange rate," Journal of Development Economics, Elsevier, vol. 75(1), pages 239-268, October.
    5. Ronald Macdonald & Luca Antonio Ricci, 2004. "Estimation Of The Equilibrium Real Exchange Rate For South Africa," South African Journal of Economics, Economic Society of South Africa, vol. 72(2), pages 282-304, June.
    6. Gregory, Allan W. & Hansen, Bruce E., 1996. "Residual-based tests for cointegration in models with regime shifts," Journal of Econometrics, Elsevier, vol. 70(1), pages 99-126, January.
    7. Claudio A Paiva, 2006. "External Adjustment and Equilibrium Exchange Rate in Brazil," IMF Working Papers 06/221, International Monetary Fund.
    8. Paruolo, Paolo, 2002. "Asymptotic Inference On The Moving Average Impact Matrix In Cointegrated I (2) Var Systems," Econometric Theory, Cambridge University Press, vol. 18(03), pages 673-690, June.
    9. Emanuel Kohlscheen, 2012. "Order Flow and the Real: Indirect Evidence of the Effectiveness of Sterilized Interventions," Working Papers Series 273, Central Bank of Brazil, Research Department.
    10. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
    11. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
    12. Kenneth Rogoff & Yu-chin Chen, 2002. "Commodity Currencies and Empirical Exchange Rate Puzzles," IMF Working Papers 02/27, International Monetary Fund.
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    Cited by:

    1. Philip Turner, 2016. "Macroprudential policies, the long-term interest rate and the exchange rate," BIS Working Papers 588, Bank for International Settlements.
    2. repec:eee:intfor:v:33:y:2017:i:3:p:707-728 is not listed on IDEAS
    3. Jaroslava Durčáková & Ondřej Šíma, 2013. "BRICS: Exchange Rate policy in Context of Internal and External Equilibrium," Český finanční a účetní časopis, University of Economics, Prague, vol. 2013(4), pages 7-29.
    4. Kohlscheen, Emanuel & Andrade, Sandro C., 2014. "Official FX interventions through derivatives," Journal of International Money and Finance, Elsevier, vol. 47(C), pages 202-216.
    5. Machado, Vicente da Gama & Portugal, Marcelo Savino, 2014. "Measuring inflation persistence in Brazil using a multivariate model," Revista Brasileira de Economia - RBE, FGV/EPGE - Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 68(2), June.
    6. Emanuel Kohlscheen & Fernando Avalos & Andreas Schrimpf, 2017. "When the Walk Is Not Random: Commodity Prices and Exchange Rates," International Journal of Central Banking, International Journal of Central Banking, vol. 13(2), pages 121-158, June.
    7. Gaglianone, Wagner Piazza & Marins, Jaqueline Terra Moura, 2017. "Evaluation of exchange rate point and density forecasts: An application to Brazil," International Journal of Forecasting, Elsevier, vol. 33(3), pages 707-728.
    8. Wagner Piazza Gaglianone & Jaqueline Terra Moura Marins, 2014. "Risk Assessment of the Brazilian FX Rate," Working Papers Series 344, Central Bank of Brazil, Research Department.

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