Equilibrium Real Exchange Rate In Brazil Estimation And Policy Implications
This paper examines the determinants of the real effective exchange rate (REER) in Brazil, from 1994 to 2003. Building on a standard theoretical model and based on the Johansen cointegration estimation, the main finding is that much of the long-run behavior of the REER can be explained by relative productivity differentials, real commodity prices, government expenditures on tradables and non-tradables, trade openness and real interest differentials. On the basis of these fundamentals, the level of misalignment of the Real was found to be surprisingly modest during the Real Plan (1994-1998). As of end 2003, the Real was found to be slightly appreciated with respect to the estimated equilibrium level, although the extent of the misalignment appears to be small as well. The paper also discusses the implications of these findings with regard to trade competitiveness.
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