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

By Willy A Hoffmaister, Carlos I. Medeiros, Pierre-Richard Agénor

October 1, 1997

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Willy A Hoffmaister, Carlos I. Medeiros, and Pierre-Richard Agénor. Cyclical Fluctuations in Brazil's Real Exchange Rate: The Role of Domestic and External Factors, (USA: International Monetary Fund, 1997) accessed December 26, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

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.

Subject: Balance of payments, Capital flows, Capital inflows, Consumption, External debt, Foreign exchange, National accounts, Real exchange rates

Keywords: And Brazil, Capital flows, Capital inflows, Consumption, Consumption decision, Equalization tax, Exchange rate, Generalized VAR analysis, Interest rate differential, Interest rate shock, Market-clearing interest rate, Mexican peso, Real exchange rate, Real exchange rates, Trade balance, World interest rate, WP

Publication Details

Pages:

32
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1997/128
Stock No:

WPIEA1281997
ISBN:

9781451935486
ISSN:

1018-5941

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