Testing Nonlinearities between Brazilian Exchange Rate and Inflation Volatilities

Christiane Rocha Albuquerque and Marcelo S. Portugal

Revista Brasileira de Economia - RBE, 2006, vol. 60, issue 4

Abstract: There are few studies, directly addressing exchange rate and inflation volatilities, and lack of consensus among them. However, this kind of study is necessary, especially under an inflation-targeting system where the monetary authority must know well price behavior. This article analyses the relation between exchange rate and inflation volatilities using a bivariate GARCH model, and therefore modeling conditional volatilities, fact largely unexplored by the literature. We find a semi-concave relation between those series, and this nonlinearity may explain their apparently disconnection under a floating exchange rate system. The article also shows that traditional tests, with non-conditional volatilities, are not robust.

Date: 2006
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Persistent link: https://EconPapers.repec.org/RePEc:fgv:epgrbe:v:60:y:2006:i:4:a:963

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