The determination of the exchange rate: a new-developmental approach

• Autor(a) principal: Bresser-Pereira, Luiz Carlos
• Data de Publicação: 2022
• Outros Autores: Feijó, Carmem, Araújo, Eliane Cristina de
• Tipo de documento: Artigo
• Idioma: eng
• Título da fonte: Repositório Institucional do FGV (FGV Repositório Digital)
• Texto Completo: https://hdl.handle.net/10438/32425
• topic: Terms of trade; Exchange rate; Capital flows; Current account; Interest rate; Economia; Taxas de câmbio; Fluxo de capitais; Taxas de juros

This paper discusses the long-term determination of the exchange rate, given that it may remain depreciated or overvalued for some time. It defines the equilibrium exchange rate and the competitive exchange rate; the latter makes investment projects competitive internationally. Instead of starting from the PPP theory, it starts from the concept of the value of foreign money or the exchange rate around which the price, the exchange rate, revolves according to the supply and demand of foreign money. This, in turn, is influenced by three factors: the terms of trade, the current-account balance as a determinant of the net capital flows or inflows, and the interest rate differential. This paper criticizes the “fundamental equilibrium” concept and develops two econometric tests. The first checks whether the four determinant variables used in the model are relevant. The second verifies whether this model is a good predictor of the exchange rate throughout time.