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Int Adv Econ Res (2010) 16:345357
DOI 10.1007/s11294-010-9276-x
Simone M. Cuiabano & Jose Angelo Divino
Published online: 9 August 2010# International Atlantic Economic Society 2010
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):303328, 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.
Keywords Exchange rate determination . Cointegration . Monetary model
JEL F21 . F30 . F17 . F47 . C53
S. M. Cuiabano
Department of Economics, University of Braslia (UnB), Brasilia, Brazil
J. A. Divino
Department of Economics, Catholic University of Brasilia (UCB), Brasilia, Brazil e-mail: [email protected]
S. M. Cuiabano (*)
University of Brasilia - Campus Universitario Darcy Ribeiro - ICC - Ala Norte, Caixa Postal 04302, 70919-970 Braslia, DF, Brazile-mail: [email protected]
Exchange Rate Determination: An Application of a Monetary Model for Brazil
346 S.M. Cuiabano, J.A. Divino
Introduction
Over the last few years, economic analyses of exchange rates experienced modifications which contributed both to the theory of exchange rate determination and to an empirical observation of exchange rate behavior. Development of econometrics and greater data availability stimulated the growth of empirical work about this subject (Sarno and Taylor 2002).
Despite growth of knowledge concerning exchange rate behavior, a great number of issues remain unsolved, mainly because of financial crises and the development of new currencies, such as the Real in Brazil. One of these issues...