EXCHANGE RATE DYNAMICS IN BRAZIL

Flavio Vilela Vieira () and Márcio Holland ()

Anais do XXXII Encontro Nacional de Economia [Proceedings of the 32th Brazilian Economics Meeting] from ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics]

Abstract: The paper aims to investigate on empirical and theoretical grounds the Brazilian exchange rate dynamics under floating exchange rates. The empirical analysis examines the short and long run behavior of exchange rate, interest rate (domestic and foreign) and country risk using econometric techniques such as variance decomposition, Granger causality, cointegration tests, error correction models, and a GARCH model to estimate the exchange rate volatility. The empirical findings suggest that one can argue in favor of a certain degree of endogeneity of the exchange rate and that flexible rates have not been able to insulate the Brazilian economy in the same patterns predicted by the literature due to its own specificities (managed floating with the use of international reserves and domestic interest rates set according to inflation target) and to externally determined variables such as the country risk. Another important outcome is the lack of a closer association of domestic and foreign interest rates since the new exchange regime has been adopted. That is, from January 1999 to May 2004, the US monetary policy has no significant impact on the Brazilian exchange rate dynamics, which has been essentially endogenous primarily when we consider the fiscal dominance expressed by the probability of default.

JEL-codes: F31 C22 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn
Date: 2004
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