The Balassa-Samuelson Effect during the Covid-19 Pandemic in Brazil

Jaqueline Marins, Marta Areosa and José Vicente

No 596, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: The Covid-19 pandemic period was unprecedented. In this paper, we analyze the behavior of the Brazilian real exchange rate during that period. To this end, we estimate an equilibrium path of the real exchange rate using an Error Correction Model. First, we verify whether movements on the exchange rate can be explained by fundamentals or they constitute a misalignment. According to our results, the real exchange rate was in line with its determinants during the pandemic, despite its strong depreciation. Second, we find the Balassa-Samuelson effect was the main driver of the exchange rate depreciation. However, the impact of the terms of trade was in the opposite direction of the Balassa-Samuelson effect, which prevented a greater exchange rate depreciation.

Date: 2024-08
New Economics Papers: this item is included in nep-lam, nep-mon and nep-opm
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