Testing Nonlinearities between Brazilian Exchange Rate and Inflation Volatilities

• Autor(a) principal: Albuquerque, Christiane Rocha
• Data de Publicação: 2006
• Outros Autores: Portugal, Marcelo S.
• Tipo de documento: Artigo
• Idioma: eng; por
• Título da fonte: Revista Brasileira de Economia (Online)
• Texto Completo: https://periodicos.fgv.br/rbe/article/view/963

There are few studies, directly addressing exchange rate and inflation volatilities, and lack of consensus among them. However, this kind of study is necessary, especially under an inflation-targeting system where the monetary authority must know well price behavior. This article analyses the relation between exchange rate and inflation volatilities using a bivariate GARCH model, and therefore modeling conditional volatilities, fact largely unexplored by the literature. We find a semi-concave relation between those series, and this nonlinearity may explain their apparently disconnection under a floating exchange rate system. The article also shows that traditional tests, with non-conditional volatilities, are not robust.