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The Long-Term “Optimal” Real Exchange Rate And The Currency Overvaluation Trend In Open Emerging Economies: The Case Of Brazil

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  • André Nassif
  • Carmem Feijó
  • Eliane Araújo

Abstract

We present a Structuralist-Keynesian theoretical approach on the determinants of the real exchange rate (RER) 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, both of which may be responsible for deviations of that actual variable from its long-term trend level. We also propose an original concept of a long-term “optimal” real exchange rate for open emerging economies. The econometric models for the Brazilian economy in the 1999–2011 period show that, among the structural variables, the GDP per capita and the terms of trade had the largest estimated coefficients correlated with the long-term trend of the RER in Brazil. As to our variables influenced by the short-term economic policies, the short-term interest rate differential and the stock of international reserves reveal the largest estimated coefficients correlated with the long-term trend of our explained variable. 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. According to our estimation, in April 2011, the real overvaluation of the Brazilian currency in relation to the long-term “optimal” level was around 80 per cent. These findings lead us to suggest in the conclusion that a mix of policy instruments should have been 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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  • André Nassif & Carmem Feijó & Eliane Araújo, 2011. "The Long-Term “Optimal” Real Exchange Rate And The Currency Overvaluation Trend In Open Emerging Economies: The Case Of Brazil," UNCTAD Discussion Papers 206, United Nations Conference on Trade and Development.
  • Handle: RePEc:unc:dispap:206
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    2. Gabriel Porcile & Diego Sanchez-Ancochea, 2021. "Institutional change and political conflict in a structuralist model [Paths to inclusive institutions]," Cambridge Journal of Economics, Oxford University Press, vol. 45(6), pages 1269-1296.
    3. Christian K. Tipoy & Marthinus C. Breitenbach & Mulatu F. Zerihun, 2017. "Equilibrium Exchange Rates and Misalignments: The Case of Homogenous Emerging Market Economies," Working Papers 201769, University of Pretoria, Department of Economics.
    4. Guilherme R. Magacho & John S. L. McCombie, 2020. "Structural change and cumulative causation: A Kaldorian approach," Metroeconomica, Wiley Blackwell, vol. 71(3), pages 633-660, July.
    5. -, 2014. "Perspectivas económicas de América Latina 2015: educación, competencias e innovación para el desarrollo," Coediciones, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), number 37445 edited by Ocde.
    6. Parantap Basu & Yoseph Getachew, 2020. "Redistributive innovation policy, inequality, and efficiency," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 22(3), pages 532-554, June.
    7. Carmem Aparecida Feij� & Marcos Tostes Lamonica & Julio Cesar Albuquerque Bastos, 2015. "Accumulation pattern of the Brazilian economy in the 1990s and 2000s," International Review of Applied Economics, Taylor & Francis Journals, vol. 29(1), pages 15-31, January.
    8. Cimoli, Mario & Pereima, João Basilio & Porcile, Gabriel, 2019. "A technology gap interpretation of growth paths in Asia and Latin America," Research Policy, Elsevier, vol. 48(1), pages 125-136.
    9. Kimolo, Deogratius & Mrema, Stanislaus, 2019. "Real Exchange Rate Misalignments in Tanzania," MPRA Paper 114672, University Library of Munich, Germany.
    10. Mario Cimoli & Jose Antonio Ocampo & Gabriel Porcile & Nunzia Saporito, 2020. "Choosing sides in the trilemma: international financial cycles and structural change in developing economies," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 29(7), pages 740-761, October.
    11. Bilal KARGI, 2014. "Time Series Analysis about the Relationship between Foreign Trade and Exchange Rate in Turkish Economy," Timisoara Journal of Economics and Business, West University of Timisoara, Romania, Faculty of Economics and Business Administration, vol. 7(2), pages 123-133, December.
    12. Moritz Cruz, 2015. "International reserves and growth: assessing the mercantilist motive in Latin America," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 37(3), pages 481-502, July.
    13. Mario Cimoli & Gabriel Porcile & Antonio Martins Neto & Fernando Sossdorf, 2017. "Productivity, social expenditure and income distribution in Latin America," Brazilian Journal of Political Economy, Center of Political Economy, vol. 37(4), pages 660-679.
    14. Eva Yamila Catela & Mario Cimoli & Gabriel Porcile, 2015. "Productivity and Structural Heterogeneity in the Brazilian Manufacturing Sector: Trends and Determinants," Oxford Development Studies, Taylor & Francis Journals, vol. 43(2), pages 232-252, June.
    15. -, 2014. "Latin American Economic Outlook 2015: Education, skills and innovation for development," Coediciones, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), number 37446 edited by Ocde.
    16. Arestis, Philip & Baltar, Carolina Troncoso, 2019. "A model of economic growth for an open emerging country: empirical evidence for Brazil," Structural Change and Economic Dynamics, Elsevier, vol. 49(C), pages 217-227.

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