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The Political Economy of Exchange Rate Policy in Brazil: an Empirical Assessment

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  • Bonomo, Marco Antonio Cesar
  • Terra, Maria Cristina Trindade

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.
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Suggested Citation

  • Bonomo, Marco Antonio Cesar & Terra, Maria Cristina Trindade, 1999. "The Political Economy of Exchange Rate Policy in Brazil: an Empirical Assessment," Revista Brasileira de Economia - RBE, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 53(4), October.
    • Handle: RePEc:fgv:epgrbe:v:53:y:1999:i:4:a:762
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    Cited by:

    1. Terra, Cristina & Valladares, Frederico, 2010. "Real exchange rate misalignments," International Review of Economics & Finance, Elsevier, vol. 19(1), pages 119-144, January.
    2. Grier, Kevin & Hernandez-Trillo, Fausto, 2007. "The real exchange rate process and its real effects: The cases of Mexico and the USA," Journal of Applied Economics, Universidad del CEMA, vol. 7(1), pages 1-25, May.
    3. Tejada, César A. O. & Portugal, Marcelo S., 2002. "Credibility and Reputation: An Application of the External Circumstances Model for the Real Plan," Revista Brasileira de Economia - RBE, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 56(4), October.
    4. Marco Bonomo & Cristina Terra, 2005. "Elections And Exchange Rate Policy Cycles," Economics and Politics, Wiley Blackwell, vol. 17(2), pages 151-176, July.
    5. Nassif, André & Morandi, Lucilene & Araújo, Eliane & Feijó, Carmem, 2020. "Economic development and stagnation in Brazil (1950–2011)," Structural Change and Economic Dynamics, Elsevier, vol. 53(C), pages 1-15.
    6. Ernesto H. Stein & Jorge M. Streb & Piero Ghezzi, 2005. "Real Exchange Rate Cycles Around Elections," Economics and Politics, Wiley Blackwell, vol. 17(3), pages 297-330, November.
    7. Sainan Huang & Cristina Terra, 2016. "Exchange Rate Populism," Economics and Politics, Wiley Blackwell, vol. 28(1), pages 105-132, March.
    8. Terra, Maria Cristina T., 2007. "The political economy of exchange rate in Brazil," FGV EPGE Economics Working Papers (Ensaios Economicos da EPGE) 656, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil).
    9. Cermeño, Rodolfo & Grier, Robin & Grier, Kevin, 2010. "Elections, exchange rates and reform in Latin America," Journal of Development Economics, Elsevier, vol. 92(2), pages 166-174, July.
    10. Arslan Razmi, 2022. "The real consequences of policy‐driven exchange rate cycles: A stylized comparison of East Asia and Latin America," Manchester School, University of Manchester, vol. 90(2), pages 190-212, March.
    11. Mr. Ari Aisen, 2004. "Money-Based Versus Exchange-Rate-Based Stabilization: Is There Space for Political Opportunism?," IMF Working Papers 2004/094, International Monetary Fund.

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