Home/Working Papers/Exchange Rate Movements and Monetary Policy In Brazil: Econometric and Simulation Evidence
Exchange Rate Movements and Monetary Policy In Brazil: Econometric and Simulation Evidence
Código: WPE – 131
Luiz Gustavo C. Furlani
Marcelo Savino Portugal
Márcio Poletti Laurinii
The literature on monetary economy has aroused growing interest in macroeconomics. Due to computational advancements, models have been increasingly more complex and accurate, allowing for the 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, on the interest rate, and on global inflation.