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The political economy of exchange rate policy in Brazil, 1964-1997

  • Marco Bonomo
  • Maria Cristina Terra

This paper analyzes political economy determinants of exchange rate policy in Brazil over the past thirty years. Two complementary methodologies are used. The first consists of investigating the exchange rate policy historical context over this period. Thus, part of the paper is dedicated to an historical account of the political economy of the exchange rate policy in Brazil from 1964 to 1997. The driving force affecting exchange rate policy was the tradeoff between the positive effect of a depreciated exchange rate on the balance of payments and its negative effect on inflation. The exchange rate policy resulting from this tradeoff depended on the political environment. An analytical framework is sketched to interpret the real exchange rate policy history, and then it is extended to encompass short-run election cycles. The second methodology is statistical. A Markov Switching Model is used to characterize statistically the exchange rate regimes, defined as valued or devalued real exchange rates, and the influence of political economy variables on regime changes. The results support the interpretation pursued in the analytical part. We found statistical evidence that the probability of an appreciated exchange rate is higher under democracy than under dictatorship. Furthermore, according to our statistical results there is also an election cycle: the probability of having an appreciated exchange rate is higher in the months preceding elections while the probability of having a depreciated exchange rate is higher in the months succeeding elections.

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Paper provided by Department of Economics PUC-Rio (Brazil) in its series Textos para discussão with number 395.

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Length: 30 pages
Date of creation: Dec 1998
Date of revision:
Handle: RePEc:rio:texdis:395
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  1. Kenneth Rogoff, 1987. "Equilibrium Political Budget Cycles," NBER Working Papers 2428, National Bureau of Economic Research, Inc.
  2. Alesina, Alberto, 1987. "Macroeconomic Policy in a Two-party System as a Repeated Game," Scholarly Articles 4552531, Harvard University Department of Economics.
  3. Stein, Ernesto H. & Streb, Jorge M., 2004. "Elections and the timing of devaluations," Journal of International Economics, Elsevier, vol. 63(1), pages 119-145, May.
  4. Rogoff, Kenneth & Sibert, Anne, 1988. "Elections and Macroeconomic Policy Cycles," Review of Economic Studies, Wiley Blackwell, vol. 55(1), pages 1-16, January.
  5. Alesina, Alberto, 1987. "Macroeconomic Policy in a Two-Party System as a Repeated Game," The Quarterly Journal of Economics, MIT Press, vol. 102(3), pages 651-78, August.
  6. repec:chb:bcchwp:02 is not listed on IDEAS
  7. Michael Bruno, 1989. "Israel's Crisis and Economic Reform: A Historical Perspective," NBER Working Papers 3075, National Bureau of Economic Research, Inc.
  8. Kaminsky, Graciela, 1993. "Is There a Peso Problem? Evidence from the Dollar/Pound Exchange Rate, 1976-1987," American Economic Review, American Economic Association, vol. 83(3), pages 450-72, June.
  9. Ilan Goldfajn & Rodrigo O. Valdes, 1996. "The Aftermath of Appreciations," NBER Working Papers 5650, National Bureau of Economic Research, Inc.
  10. Ernesto H. Stein & Jeffry Frieden, 2000. "The Political Economy of Exchange Rate Policy in Latin America: An Analytical Overview," Research Department Publications 3118, Inter-American Development Bank, Research Department.
  11. Maria Cristina Terra, 1995. "Openess and inflation: a new assessment," Textos para discussão 339, Department of Economics PUC-Rio (Brazil).
  12. Bollen, Nicolas P. B. & Gray, Stephen F. & Whaley, Robert E., 2000. "Regime switching in foreign exchange rates: Evidence from currency option prices," Journal of Econometrics, Elsevier, vol. 94(1-2), pages 239-276.
  13. Hamilton, James D, 1989. "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Econometric Society, vol. 57(2), pages 357-84, March.
  14. Lars E. O. Svensson, 1992. "An Interpretation of Recent Research on Exchange Rate Target Zones," Journal of Economic Perspectives, American Economic Association, vol. 6(4), pages 119-144, Fall.
  15. Francis X. Diebold & Joon-Haeng Lee & Gretchen C. Weinbach, 1993. "Regime switching with time-varying transition probabilities," Working Papers 93-12, Federal Reserve Bank of Philadelphia.
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