Current Account and Real Effective Exchange Rate Dynamics: The Role of Nonlinear Dynamics in Brazil

Emerson Marçal and Oscar Simões

Brazilian Review of Econometrics, 2026, vol. 43, issue 2

Abstract: Current account imbalances significantly impact economic policy, withsharp exchange rate movements often causing disruptions. Hamilton’s[1989] Markov Switching Model introduced a framework for analyzing suchdynamics. Few papers have used non-linear multivariate models to studycurrent accounts and real effective exchange rates. This paper documentsthe existence of non-linearity by estimating a Markov Switching VECMand showing its superiority against a linear benchmark for the Brazilianeconomy in the period of inflation target and dirty floating regime. Themonthly frequency and the sample cover the period from 1999-2 to 2024-3.Two regimes were identified. One regime is related to crisis events and theother to tranquil periods. Both real exchange rate and current accountdynamics differ across regimes highlighting the necessity of modelling non-linearity.

Date: 2026
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Working Paper: Current account and real effective exchange rate dynamics: the role of non-linear dynamics in Brazil (2024)
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