The Political Economy of Exchange Rate Policy in Brazil: 1964-1997

46 Pages Posted: 19 Apr 2011

See all articles by Marco Bonomo

Marco Bonomo

Insper Institute of Education and Research

Cristina Terra

affiliation not provided to SSRN

Date Written: May 1999

Abstract

This paper analyzes political economy determinants of exchange rate policy in Brazil over the past thirty years. Two complementary methodologies are used. The first consists of investigating the exchange rate policy historical context over this period. Thus, part of the paper is dedicated to an historical account of the political economy of the exchange rate policy in Brazil from 1964 to 1997. The driving force affecting exchange rate policy was the tradeoff between the positive effect of a depreciated exchange rate on the balance of payments and its negative effect on inflation. The exchange rate policy resulting from this tradeoff depended on the political environment. An analytical framework is sketched to interpret the real exchange rate policy history, and then it is extended to encompass short-run election cycles. The second methodology is statistical. A Markov Switching Model is used to characterize statistically the exchange rate regimes, defined as valued or devalued real exchange rates, and the influence of political economy variables on regime changes. The results support the interpretation pursued in the analytical part. We found statistical evidence that the probability of an appreciated exchange rate is higher under democracy than under dictatorship. Furthermore, according to our statistical results there is also an election cycle: the probability of having an appreciated exchange rate is higher in the months preceding elections while the probability of having a depreciated exchange rate is higher in the months succeeding elections.

Suggested Citation

Bonomo, Marco and Terra, Cristina, The Political Economy of Exchange Rate Policy in Brazil: 1964-1997 (May 1999). IDB Working Paper No. 103, Available at SSRN: https://ssrn.com/abstract=1814647 or http://dx.doi.org/10.2139/ssrn.1814647

Marco Bonomo (Contact Author)

Insper Institute of Education and Research ( email )

R Quata 300
Sao Paulo, 04542-030
Brazil

Cristina Terra

affiliation not provided to SSRN

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
107
Abstract Views
498
rank
279,143
PlumX Metrics