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

  • Emanuel Kohlscheen

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.

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File URL: http://www.bcb.gov.br/pec/wps/ingl/wps314.pdf
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Paper provided by Central Bank of Brazil, Research Department in its series Working Papers Series with number 314.

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Date of creation: Jul 2013
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Handle: RePEc:bcb:wpaper:314
Contact details of provider: Web page: http://www.bcb.gov.br/?english

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  1. Emanuel Kohlscheen, 2010. "Emerging Floaters: pass-throughs and (some) new commodity currencies," Working Papers Series 224, Central Bank of Brazil, Research Department.
  2. Gregory, A.W. & Hansen, B.E., 1992. "Residual-Based Tests for Cointegration in Models with Regime Shifts," RCER Working Papers 335, University of Rochester - Center for Economic Research (RCER).
  3. Claudio Paiva, 2006. "External Adjustment and Equilibrium Exchange Rate in Brazil," IMF Working Papers 06/221, International Monetary Fund.
  4. Gregory, Allan W & Hansen, Bruce E, 1996. "Tests for Cointegration in Models with Regime and Trend Shifts," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 58(3), pages 555-60, August.
  5. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501, March.
  6. 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.
  7. Emanuel Kohlscheen, 2013. "Order Flow and the Real: Indirect Evidence of the Effectiveness of Sterilized Interventions," BIS Working Papers 426, Bank for International Settlements.
  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. Jaromir Benes & Andrew Berg & Rafael A Portillo & David Vavra, 2013. "Modeling Sterilized Interventions and Balance Sheet Effects of Monetary Policy in a New-Keynesian Framework," IMF Working Papers 13/11, International Monetary Fund.
  10. Y.Chen & K. Rogoff, 2003. "Commodity Currencies and Empirical Exchange Rate Puzzles," DNB Staff Reports (discontinued) 76, Netherlands Central Bank.
  11. 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.
  12. 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, 06.
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