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The Political Economy of Exchange Rate Policy in Brazil: 1964-1997

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  • Marco Bonomo
  • Cristina Terra

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.

Suggested Citation

  • Marco Bonomo & Cristina Terra, 1999. "The Political Economy of Exchange Rate Policy in Brazil: 1964-1997," Research Department Publications 3065, Inter-American Development Bank, Research Department.
    • Handle: RePEc:idb:wpaper:3065
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    References listed on IDEAS

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    2. Stein, Ernesto H. & Streb, Jorge M., 2004. "Elections and the timing of devaluations," Journal of International Economics, Elsevier, vol. 63(1), pages 119-145, May.
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    Cited by:

    1. 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.
    2. Ernesto H. Stein & Jeffry Frieden, 2000. "The Political Economy of Exchange Rate Policy in Latin America: An Analytical Overview," Research Department Publications 3118, Inter-American Development Bank, Research Department.
    3. Marco Bonomo & Cristina Terra, 2005. "Elections And Exchange Rate Policy Cycles," Economics and Politics, Wiley Blackwell, vol. 17(2), pages 151-176, July.
    4. Terra, Cristina & Valladares, Frederico, 2010. "Real exchange rate misalignments," International Review of Economics & Finance, Elsevier, vol. 19(1), pages 119-144, January.
    5. Sergio Da Silva & Guilherme Moura, 2005. "Is There a Brazilian J-Curve?," Economics Bulletin, AccessEcon, vol. 6(10), pages 1-17.
    6. 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.
    7. Nelson H. Barbosa-Filho, 2001. "The balance-of-payments constraint:from balanced trade to sustainable debt," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 54(219), pages 381-400.
    8. 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.
    9. 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.
    10. Irineu De Carvalho Filho & Marcos Chamon, 2008. "A Micro-Empirical Foundation for the Political Economy of Exchange Rate Populism," IMF Staff Papers, Palgrave Macmillan, vol. 55(3), pages 481-510, July.
    11. 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.
    12. repec:ebl:ecbull:v:6:y:2005:i:10:p:1-17 is not listed on IDEAS
    13. Sainan Huang & Cristina Terra, 2016. "Exchange Rate Populism," Economics and Politics, Wiley Blackwell, vol. 28(1), pages 105-132, March.
    14. 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).
    15. Louis Sevitenyi Nkwatoh & Yahya Zakari Abdullahi & Chika Usman Aliyu, 2019. "Past and Current European Monetary Union Crises: Lessons for the Envisaged West African Monetary Union," International Journal of Economics and Financial Issues, Econjournals, vol. 9(4), pages 50-59.
    16. 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.

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