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The trend of the real exchange rate overvaluation in open emerging economies: the case of Brazil

  • André Nassif

    ()

    (Universidade Federal Fluminense e BNDES)

  • Carmem Feijó

    ()

    (Universidade Federal Fluminense)

  • Eliane Araújo

    ()

    (Universidade Estadual de Maringá)

We present a Structuralist-Keynesian theoretical approach on the determining factors of the real exchange rate for open emerging economies. Instead of macroeconomic fundamentals, the long-term trend of the real exchange rate level is better determined not only by structural forces and long-term economic policies, but also by both short-term macroeconomic policies and their indirect effects on other short-term economic variables. In our theoretical model, the actual real exchange rate is broken down into long-term structural and short-term components, and both of which may be responsible for deviations of that actual variable from its long-term trend level. The econometric model for the Brazilian economy in the 1999-2010 period shows that the terms of trade and the short-term interest rate differential are the most significant variables that explain the long-term trend of the real exchange rate overvaluation in Brazil. We also propose an index of overvaluation and an original definition of a long-term “optimal” real exchange rate for open emerging economies. The econometric results show two basic conclusions: first the Brazilian currency was persistently overvalued throughout almost all of the period under analysis; and second, the long-term “optimal” real exchange rate was reached in 2004. In January 2011, the average nominal exchange rate should be around 2.91 Brazilian reais per US dollar for reaching that “optimal” level, against an observed average nominal exchange rate of 1.67 Brazilian reais per US dollar. According to this estimation, in January 2011, the real overvaluation of the Brazilian currency in relation to the long-term ¨optimal¨ level was around 74 per cent. These findings lead us to suggest in the conclusion that a mix of policy instruments should be used in order to reverse the overvaluation trend of the Brazilian real exchange rate, including a target for reaching the “optimal” real exchange rate in the medium and the long-run.

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Paper provided by Universidade Federal do Paraná, Department of Economics in its series Working Papers with number 0111.

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Length: 56 pages
Date of creation: 2011
Date of revision:
Handle: RePEc:fup:wpaper:0111
Note: Creation Date corresponds to the year in which the paper was published on the Department of Economics website. The paper may have been written a small number of months before its publication date.
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  16. repec:cup:cbooks:9780521144537 is not listed on IDEAS
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