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Empirical exchange rate models fit: Evidence from the Brazilian economy
Código: WPE – 094
Marcelo L. Moura
Adauto R. S. Lima
In this article, we test the adequacy and forecasting performance of empirical exchange rate models for an emerging commodity exporter economy with independently floating regime. In particular, we study those models using data from the Brazilian economy. The tested economic models include the Flexible Price Monetary Model (FPMM) and its specification of the Asset Model, the Sticky Price Monetary Model (SPMM), the Portfolio Balance Model and the Market Model based on real-time information used in international trade desks. Our main result is to show that, opposed to the results shown in the classic literature, some of our specifications may forecast moves in the nominal exchange rate to a better result than that of a driftless random walk. In particular, the best specifications include variables that capture the monetary policy (M1 and interest rate), country risk (EMBI) and terms of trade.