Sunday, October 11, 2009: 11:35 AM
The goal of this paper is to test a variant of the monetarist exchange rate determination model, described by Obstfeld and Rogoff (1996), for the Brazilian economy in the recent period. The model starts with Cagan money demand, which is append by the hypotheses of purchase power parity and uncovered interest parity (UIP). We use monthly data of exchange rate, GDP, and interest rate for Brazil and US interest rate and inflation as proxies for international variables. We apply cointegration tests to identify a long run relationship among the variables. The estimated error correction model offers a exchange rate determination model in short run. Due to potential endogeneity of some variables, it was applied GMM to estimate a long run model of exchange rate determination. The results point to the existence of long run equilibrium among the variables. The statistical insignificance of the proxy for international interest rate might indicate that the UIP does not hold in the period.