The trasition from fixed to floating exchange rate regimes: the case of Brazil

This dissertation evaluates macroeconomic management in Brazil from 1994 to the present, with particular focus on exchange rate policy. It points out that while Brazil's Real Plan succeeded in halting the hyperinflation that had reached more than 2000 percent in 1993, it also caused significant real appreciation of the exchange rate situation that was only made worse by the extremely high interest rates and ensuing bout of severe financial crises in the intemational arena. By the end of 1998, the accumulation of internai and externai imbalances led the authorities to drop foreign exchange controls and allow the currency to float. In spite of some initial scepticism, the flexible rate regime cum inflation target proved to work well. Inflation was kept under control; the current account position improved significantly, real interest rates fell and GDP growth resumed. Thus, while great challenges still lie ahead, the recent successes bestow some optimism on the well functioning of this exchange rate regime. The Brazilian case suggests that successful transition from one foreign exchange system to another, particularly during financial crisis, does not depend only on one variable be it fiscal or monetary. In reality, it depends on whole set of co-ordinated policies aimed at resuming price stability with as little exchange rate and output volatility as possible.

Debt composition and exchange rate balance sheet effects in Brazil: A firm level analysis

In this paper we study the interaction between macroeconomic environment and firms’ balance sheet effects in Brazil during the 1990’s. We start by assessing the influence of macroeconomic conditions on firms’ debt composition in Brazil. We found that larger firms tend to change debt currency composition more in response to a change in the exchange rate risk than small firms. We then proceed to investigate if and how exchange rate balance sheet effects affected the firms’ investment decisions. We test directly the exchange rate balance sheet effect on investment. Contrary to earlier findings (Bleakley and Cowan, 2002), we found that firms more indebted in foreign currency tend to invest less when there is an exchange rate devaluation. We tried different controls for the competitiveness effect. First, we control directly for the effect of the exchange rate on exports and imported inputs. We then pursue an alternative investigation strategy, inspired by the credit channel literature. According to this perspective, Tobin’s q can provide an adequate control for the competitiveness effect on investment. Our results provide supporting evidence for imperfect capital markets, and for a negative exchange rate balance sheet effect in Brazil. The results concerning the exchange rate balance sheet effect on investment are statistically significant and robust across the different specifications. We tested the results across different periods, classified according to the macroeconomic environment. Our findings suggest that the negative exchange rate balance sheet effect we found in the whole sample is due to the floating exchange rate period. We also found that exchange rate devaluations have important negative impact on both cash flows and sales of indebted firms. Furthermore, the impact of exchange rate variations is asymmetric, and the significant effect detected when no asymmetry is imposed is engendered by exchange rate devaluations.

Real exchange rate misalignments

This paper characterizes episodes of real appreciations and depreciations for a sample of 85 countries, approximately from 1960 to 1998. First, the equilibrium real exchange rate series are constructed for each country using Goldfajn and Valdes (1999) methodology (cointegration with fundamentals). Then, departures from equilibrium real exchange rate (misalignments) are obtained, and a Markov Switching Model is used to characterize the misalignments series as stochastic autoregressive processes governed by two states representing di¤erent means. Three are the main results we …nd: …rst, no evidence of di¤erent regimes for misalignment is found in some countries, second, some countries present one regime of no misalignment (tranquility) and the other regime with misalignment (crisis), and, third, for those countries with two misalignment regimes, the lower mean misalignment regime (appreciated) have higher persistence that the higher mean one (depreciated).

The political economy of exchange rate in Brazil

This paper reviews part of the political economy literature on exchange rate policy relevant to understanding the political motivations behind the Brazilian exchange rate policy. We shall first examine the distributive role of the exchange rate, and the way it unfolds in terms of the desired political goals. We will follow by analyzing exchange policy as indicative of government effciency prior to elections. Finally, we discuss fiscal policy from the point of view of political economy, in which the exchange rate results from the macroeconomic equilibrium. Over this review, the Brazilian exchange rate policy is discussed in light of the theories presented.

Exchange rate: fix, float, or manage it?

The Exchange Rate is the Most Strategic of the Four Macroeconomic Prices. it Determines not Only Exports and Imports, But Also Real Wages, Consumption and the Savings Rate. Conventional Theory Holds That it is Impossible to Manage It, and That the Only Alternatives are to Fix or to Float It. the Experience of the East Asian Countries, That Use it Strategically, Demonstrates That This Claim is False.

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.

Exchange rate policies, patterns of specialization and economic development: theory and evidence in developing countries

The objectives of this paper are twofold. First, it intends to provide theoretical elements to analyze the relation between real exchange rates and economic development. Our main hypothesis is very much in line with the Dutch disease literature, and states that competitive currencies contribute to the existence and maintenance of the anufacturing sector in the economy. This, in turn, brings about higher growth rates in the long run, given the existence of increasing returns in the industrial sector, and its importance in generating echnological change and increasing productivity in the overall economy. The second objective of this paper is empirical. It intends to analyze examples of successful exchange rate policies, such as Chile and Indonesia in the eighties, as a benchmark for comparison with countries where currency overvaluation has taken place, such as Brazil. In the latter case, the local currency is being inflated by large capital inflows, due to high domestic interest rates and to a boom in demand and prices of commodities in the international markets. It will be argued that the industrial sector bears most of the burden when the currency appreciates, and that Brazil risks at deindustrialization if there are no changes in the exchange rate regime

The political economy of exchange rate policy in Brazil: 1964-1999

This paper was developed as part of a broader research program on the political economy of exchange rate policies in Latin America and the Caribbean. We are grateful for helpful comments and suggestions from Jeff Frieden, Ernesto Stein, Jorge Streb, Marcelo Neri and seminar participants at Getulio Vargas Foundation, PUC-Rio, IDB workshop on The Political Economy of Exchange Rate Policies in Latin America and the Caribbean, and LACEA meeting in Buenos Aires. We thank René Garcia for providing us with a Fortran program for estimating the Markov Switching Model, Ilan Goldfajn for sending us updated estimates of the real exchange rate series of Goldfajn and Valdés (1996), Altamir Lopes and Ricardo Markwald for kindly furnishing data on Brazilian external accounts, and Carla Bernardes, Gabriela Domingues, Juliana Pessoa de Araújo, and, specially, Marcelo Pinheiro for excellent research assistant. Both authors thank CNPq for a research fellowship.

Micro evidence on brazilian price stickiness and its consequences for sectoral real exchange rate and inflation persistence

The purpose of this thesis is to investigate the price-setting behavior in Brazil and, in particular, the effects on inflation and good-level real exchange rate persistence. This thesis is composed by three Chapters. In the first Chapter, we present the main stylized facts about the behavior of retail prices in Brazil using micro data from the CPI index computed by the Fundação Getulio Vargas. Moreover we construct time series of price-setting statistics and relate them to macroeconomic variables using regression analyses. In Chapter 2, we investigated the relevance of heterogeneity in countries price stickiness on good-level real exchange rate persistence, considering a newly constructed panel data set of relative prices of 115 common products between the U.S. and Brazil. Chapter 3 is devoted to the relation between sectoral price stickiness and inflation persistence.

Growth and exchange rate volatility: a panel data analysis

The aim of this article is to assess the role of real effective exchange rate volatility on long-run economic growth for a set of 82 advanced and emerging economies using a panel data set ranging from 1970 to 2009. With an accurate measure for exchange rate volatility, the results for the two-step system GMM panel growth models show that a more (less) volatile RER has significant negative (positive) impact on economic growth and the results are robust for different model specifications. In addition to that, exchange rate stability seems to be more important to foster long-run economic growth than exchange rate misalignment

Exchange rate misalignments, interdependence, crises, and currency wars: an empirical assessment

Este trabalho tem por objetivo comparar metodologias distintas para cálculo de desalinhamento cambial além de testar a hipótese se as taxas de câmbio dos diversos países sofrem influencia apenas dos seus próprios fundamentos ou também da taxa de câmbio e dos fundamentos de outros países. Estas hipóteses consistem, respectivamente, na ausência ou na existência de interdependência entre os diversos países. Para realizar tal tarefa utilizam-se duas estratégias empíricas. A primeira baseia-se em avaliar se um modelo multivariado de séries de tempo usualmente utilizada na literatura de desalinhamento cambial com dados apenas do próprio país em análise pode ser melhorado através da adição de variáveis relacionadas a outros países usando o algoritmo proposto por David Hendry e co-autores. A segunda estratégia consiste em estimar um panel longo com as variáveis utilizadas para estimar desalinhamento cambial e testar formalmente a hipótese de ausência de interdependências. Os resultados sugerem que em ambas estratégias existe evidência de existência de interdependência. Esta ocorreria mais por conta de fatores ligados ao curto prazo, ou seja, o que explicaria o valor da taxa de câmbio de um país no longo prazo seriam seus próprios fundamentos enquanto no curto prazo fatores externos poderiam causar desvios

Temporal causality between the exchange rate and the trade balance : the case of Brazil

The paper assesses the impact of intemational relative prices and domestic expenditure variables on Brazil' s foreign trade performance in the first half of the 1990s. It has been argued that the appreciation of the Real since 1994 has had a detrimental impact of the country's trade balance. However, using temporal precedence analysis, our results do not indicate that the trade balance is strongly affected by intemational rei ative prices, such as the exchange rate. Instead, domestic expenditure variables appear to be more powerful determinant of the country' s trade performance in recent years. Granger and error correction causality techniques are used to determine temporal precedence between the trade balance and the exchange rate in the period under examination. Our findings shed light on the debate over the sustainability of recent exchange rate-anchored macroeconomic stabilisation programmes, which is a topic that has encouraged a lot of debate among academics and practitioners.

Does monetary policy stabilize the exchange rate following a currency crisis?

This paper provides evidence on the relationship between rnonetary policy and the exchange rate in the aftermath of currency crises. It ana1yzes a large data set of currency crises in 80 countries in the period 1980 to 1998. The rnain question addressed is: can rnonetary policy significantly alter the probability of reversing the post-crisis undervaluation through nominal appreciation rather than higher int1ation? We find that tight rnonetary policy facilitates the reversal of currency undervaluation through nominal appreciation rather than inflation. When the econorny is also facing a banking crisis, depending on the specification, tight rnonetary policy rnay not have the same effect.