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Exchange Rate Determination: An Application of a Monetary Model for Brazil

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  • Simone Cuiabano
  • Jose Divino

Abstract

The goal of this paper is to test a variant of the monetary exchange rate determination model, described by Obstfeld and Rogoff ( 1996 ), for the Brazilian economy in the recent period. The model starts with the Cagan (The Journal of Political Economy, 66(4):303–328, 1958 ) money demand, which is complemented by the hypotheses of purchase power parity (PPP) and uncovered interest parity (UIP). We used monthly data of exchange rate, GDP, interest rate for Brazil, and U.S. interest rate and inflation as proxies for international variables. We applied cointegration tests to identify a long run relationship among the variables. The estimated error correction model offers an exchange rate determination model in the short run. Due to potential endogeneity of some variables, GMM was applied to estimate a long-run model of exchange rate determination. The forecasting results of both estimatives were compared with a random walk approach. The results point to the existence of a long and short run equilibrium Real/dollar exchange rate using the structural model, which may be the achievement of this paper. Copyright International Atlantic Economic Society 2010

Suggested Citation

  • Simone Cuiabano & Jose Divino, 2010. "Exchange Rate Determination: An Application of a Monetary Model for Brazil," International Advances in Economic Research, Springer;International Atlantic Economic Society, vol. 16(4), pages 345-357, November.
    • Handle: RePEc:kap:iaecre:v:16:y:2010:i:4:p:345-357:10.1007/s11294-010-9276-x
    DOI: 10.1007/s11294-010-9276-x
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    References listed on IDEAS

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    2. Engle, Robert & Granger, Clive, 2015. "Co-integration and error correction: Representation, estimation, and testing," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 39(3), pages 106-135.
    3. Cheung, Yin-Wong & Chinn, Menzie D. & Pascual, Antonio Garcia, 2005. "Empirical exchange rate models of the nineties: Are any fit to survive?," Journal of International Money and Finance, Elsevier, vol. 24(7), pages 1150-1175, November.
    4. Serena Ng & Pierre Perron, 2001. "LAG Length Selection and the Construction of Unit Root Tests with Good Size and Power," Econometrica, Econometric Society, vol. 69(6), pages 1519-1554, November.
    5. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, December.
    6. Marcelo Kfoury Muinhos & Paulo Springer de Freitas & Fabio Araujo, 2001. "Uncovered Interest Parity with Fundamentals: A Brazilian Exchange Rate Forecast Model," Working Papers Series 19, Central Bank of Brazil, Research Department.
    7. Moura, Marcelo L. & Lima, Adauto R. S., 2007. "Empirical exchange rate models fit: Evidence from the Brazilian economy," Insper Working Papers wpe_87, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
    8. Philip Cagan, 1958. "The Demand for Currency Relative to Total Money Supply," NBER Chapters, in: The Demand for Currency Relative to Total Money Supply, pages 1-37, National Bureau of Economic Research, Inc.
    9. Marcelo Kfoury Muinhos & Sérgio Afonso Lago Alves & Gil Riella, 2002. "Modelo Estrutural com Setor Externo: Endogenização do Prêmio de Risco e do Câmbio," Working Papers Series 42, Central Bank of Brazil, Research Department.
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    Cited by:

    1. Cuiabano, Simone, 2017. "Long-run equilibrium exchange rate in Latin America and Asia: a comparison using cointegrated vector," TSE Working Papers 17-837, Toulouse School of Economics (TSE).
    2. Works, Richard Floyd, 2016. "Econometric modeling of exchange rate determinants by market classification: An empirical analysis of Japan and South Korea using the sticky-price monetary theory," MPRA Paper 76382, University Library of Munich, Germany.
    3. Works, Richard & Haan, Perry, 2017. "An Empirical Study of Japanese and South Korean Exchange Rates Using the Sticky-Price Monetary Theory," MPRA Paper 77235, University Library of Munich, Germany.

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    More about this item

    Keywords

    Exchange rate determination; Cointegration; Monetary model; F21; F30; F17; F47; C53;
    All these keywords.

    JEL classification:

    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F30 - International Economics - - International Finance - - - General
    • F17 - International Economics - - Trade - - - Trade Forecasting and Simulation
    • F47 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Forecasting and Simulation: Models and Applications
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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