Exchange rate dynamics in Brazil

The paper aims to investigate on empirical and theoretical grounds the Brazilian exchange rate dynamics under floating exchange rates. The empirical analysis examines the short and long term behavior of the exchange rate, interest rate (domestic and foreign) and country risk using econometric techniques such as variance decomposition, Granger causality, cointegration tests, error correction models, and a GARCH model to estimate the exchange rate volatility. The empirical findings suggest that one can argue in favor of a certain degree of endogeneity of the exchange rate and that flexible rates have not been able to insulate the Brazilian economy in the same patterns predicted by literature due to its own specificities (managed floating with the use of international reserves and domestic interest rates set according to inflation target) and to externally determined variables such as the country risk. Another important outcome is the lack of a closer association of domestic and foreign interest rates since the new exchange regime has been adopted. That is, from January 1999 to May 2004, the US monetary policy has no significant impact on the Brazilian exchange rate dynamics, which has been essentially endogenous primarily when we consider the fiscal dominance expressed by the probability of default.

The Brazilian foreign exchange market through the microstructure perspective

The objective of this study is to investigate whether the relationship between order ow and the spot exchange rate stems from the fact that the ow aggregates information on dispersed economic fundamentals in the economy. To perform this test, a database that includes all transactions of the commercial and nancial segments of the Brazilian primary foreign exchange market between January of 1999 and May of 2008 was used. We show that the order ow was partly responsible for variations in in ation expectations over the time period and that this relationship did not remain robust, drawing comparisons with other fundamentals such as GDP and Industrial Production.