Appreciating Exchange Rate And Inflation: What Can Be Expected?

BRAZIL ECONOMICS - Report 10 Apr 2014 by Marcelo Gazzano, Cristina Pinotti and Affonso Pastore
Executive SummaryThe Central Bank has continued selling foreign exchange swaps even since the real started appreciating. What is the aim of this action? One possibility is that, lacking the freedom to raise the interest rate sufficiently because the government does not want any further deceleration in economic growth in an election year, it has opted to reduce pressures on the prices of tradables through a stronger currency.We estimated a VAR model whose specification allows assessing the asymmetry in the pass-through of currency movements to free prices in the IPCA. The result shows that d...

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