Exchange rate movements and monetary policy in Brazil: Econometric and simulation evidence

• Published in: Economic modelling Vol. 27; no. 1; pp. 284 - 295
• Main Authors: Furlani, Luiz Gustavo Cassilatti, Portugal, Marcelo Savino, Laurini, Márcio Poletti
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 2010; Elsevier; Elsevier Science Ltd
• Series: Economic Modelling
• Subjects: Bayesian methods; Brazil; Central banks; Computational methods; Dynamic and stochastic general equilibrium (DSGE) models; Dynamic and stochastic general equilibrium (DSGE) models Monetary policy Exchange rate Bayesian methods Simulation; Econometrics; Equilibrium models; Estimating techniques; Exchange rate; Exchange rates; Foreign exchange rates; Interest rates; Monetary policy; Simulation; Stochastic models; Studies; Brazil; F41; E52; Bayesian methods; Simulation; Dynamic and stochastic general equilibrium (DSGE) models; Monetary policy; E47; Exchange rate
• ISSN: 0264-9993; 1873-6122
• DOI: 10.1016/j.econmod.2009.09.008

The literature on monetary economy has aroused growing interest in macroeconomics. Due to computational advancements, models have become increasingly more complex and accurate, allowing for an in-depth analysis of the relationships between real economic variables and nominal variables. Therefore, using a dynamic stochastic general equilibrium (DSGE) model, based on Gali and Monacelli (2005), we propose and estimate a model for the Brazilian economy by employing Bayesian methods so as to assess whether the Central Bank of Brazil takes exchange rate fluctuations into account in the conduct of monetary policy. The most striking result of the present study is that the Central Bank of Brazil does not directly change the interest rate path due to exchange rate movements. A simulation exercise is also used. Our conclusion is that the economy quickly accommodates shocks induced separately on the exchange rate, on the terms of trade, interest rate, and global inflation.