Cyclical Fluctuations in Brazil's Real Exchange Rate: The Role of Domestic and External Factors
32 Pages Posted: 15 Feb 2006
Date Written: October 1997
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: Real exchange rate, capital inflows, generalized VAR analysis, Brazil
JEL Classification: E44, F32, F34
Suggested Citation: Suggested Citation