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Quo Vadis Real? Estimating the Brazilian Real Exchange Rate Misalignment in Vector Error Correction Model with Structural Change

17 Pages Posted: 19 Sep 2008 Last revised: 15 Jun 2011

Emerson Fernandes Marçal

Sao Paulo School of Economics - FGV; Mackenzie Presbyterian University

Fernando C. Barbi

Getulio Vargas Foundation (FGV) - Sao Paulo School of Economics

Date Written: November 1, 2010

Abstract

This paper aims to estimate the equilibrium real exchange rate for the Brazilian economy. The equilibrium exchange rate is defined as the level of exchange rate that guarantees the stability of the net foreign asset position over time. An econometric model is estimated using a Vector Error Correction Model with structural breaks. The main conclusion of the paper is that the Brazilian exchange rate is below its long run values. The model also suggests that the improvement in fundamentals observed in the recent past is about to end. The level of misalignment is estimated at 18% in third quarter of 2009.

Keywords: cointegration, fundamentals

JEL Classification: C10, F10

Suggested Citation

Marçal, Emerson Fernandes and Barbi, Fernando C., Quo Vadis Real? Estimating the Brazilian Real Exchange Rate Misalignment in Vector Error Correction Model with Structural Change (November 1, 2010). Available at SSRN: https://ssrn.com/abstract=1268373 or http://dx.doi.org/10.2139/ssrn.1268373

Emerson Marçal (Contact Author)

Sao Paulo School of Economics - FGV ( email )

Rua Itapeva 286 10 andar
São Paulo, São Paulo 01332-000
Brazil
551137993382 (Phone)

HOME PAGE: http://cemap.fgv.br/en/emerson-marcal-en

Mackenzie Presbyterian University ( email )

Rua da Consolação 920
Sala 213
01302-907 Sao Paulo, São Paulo 010302907
Brazil
55-11-21148268 (Phone)

HOME PAGE: http://www.mackenzie.br/stricto_administracao_empresas.html

Fernando Barbi

Getulio Vargas Foundation (FGV) - Sao Paulo School of Economics ( email )

Sao Paulo
Brazil

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