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Overvaluation trend of the Brazilian currency in the 2000s: Empirical estimation

Author

Listed:
  • André Nassif
  • Carmem Feijó
  • Eliane Araújo

Abstract

The aim of this paper is to discuss the trend of overvaluation of the Brazilian currency in the 2000s, presenting an econometric model to estimate the real exchange rate (RER) and which should be a reference level of the RER to guide long-term economic policy. In the econometric model, we consider long-term structural and short-term components, both of which may be responsible for explaining overvaluation trend of the Brazilian currency. Our econometric exercise confirms that the Brazilian currency had been persistently overvalued throughout almost all of the period under analysis, and we suggest that the long-term reference level of the real exchange rate was reached in 2004. In July 2014, the average nominal exchange rate should have been around 2.90 Brazilian reais per dollar (against an observed nominal rate of 2.22 Brazilian reais per dollar) to achieve the 2004 real reference level (average of the year). That is, according to our estimates, in July 2014 the Brazilian real was overvalued at 30.6 per cent in real terms relative to the reference level. Based on these findings we conclude the paper suggesting a mix of policy instruments that should have been used in order to reverse the overvaluation trend of the Brazilian real exchange rate, including a target for reaching a real exchange rate in the medium and the long-run which would favor resource allocation toward more technological intensive sectors. JEL Classification: F30; F31; F39.

Suggested Citation

  • André Nassif & Carmem Feijó & Eliane Araújo, 2015. "Overvaluation trend of the Brazilian currency in the 2000s: Empirical estimation," Brazilian Journal of Political Economy, Center of Political Economy, vol. 35(1), pages 3-27.
    • Handle: RePEc:ekm:repojs:v:35:y:2015:i:1:p:3-27:id:211
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    File URL: https://centrodeeconomiapolitica.org.br/repojs/index.php/journal/article/view/211/201
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    Citations

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    Cited by:

    1. Douglas Alencar & Frederico G. Jayme Jr & Gustavo Britto, 2021. "A post-Kaleckian model with productivity growth and real exchange rate applied to selected Latin American countries," PSL Quarterly Review, Economia civile, vol. 74(297), pages 127-146.
    2. Andre Nassif & Carmem Aparecida Feijo & Eliane Araújo, 2016. "Structural change, catching up and falling behind in the BRICS: A comparative analysis based on trade pattern and Thirlwall’s Law," PSL Quarterly Review, Economia civile, vol. 69(279), pages 373-421.
    3. Antonio Soares Martins Neto, 2017. "Income distribution and external constraint: Brazil in the commodities boom [Income distribution and external constraint: Brazil in the commodities boom]," Nova Economia, Economics Department, Universidade Federal de Minas Gerais (Brazil), vol. 27(1), pages 7-34, January-A.

    More about this item

    Keywords

    real exchange rate; economic policy dilemmas; Brazil;
    All these keywords.

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F39 - International Economics - - International Finance - - - Other

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