Cyclical Fluctuations in Brazil's Real Exchange Rate: The Role of Domestic and External Factors

Alexander Hoffmaister, Carlos Medeiros and Pierre-Richard Agénor

No 1997/128, IMF Working Papers from International Monetary Fund

Abstract: This paper examines the effects of capital inflows and domestic factors on Brazil’s real exchange rate. It describes the analytical framework, and then estimates a near-VAR model linking capital flows, interest rate differentials, government spending, money-base velocity, and the temporary component of the real exchange rate (TCRER). Generalized variance decompositions indicate that world interest rate shocks largely explain medium-term fluctuations in capital flows and the TCRER. Generalized impulse response functions show that a reduction in the world interest rate (and, to a lesser extent, an increase in government spending) have significant effects on the TCRER and capital flows.

Keywords: WP; exchange rate; interest rate differential; trade balance; Real exchange rate; capital inflows; generalized VAR analysis; and Brazil; world interest rate; equalization tax; interest rate shock; market-clearing interest rate; consumption decision; Mexican peso; Real exchange rates; Capital flows; Consumption (search for similar items in EconPapers)
Pages: 32
Date: 1997-10-01
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Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:1997/128

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