Testing the Existence of Bubbles in the Brazilian Exchange Rate
IPEA Working Paper No. 881
Posted: 22 Jul 2003
Date Written: May 2002
Abstract
The Brazilian exchange rate has suffered strong fluctuations in the last year. They resulted from the Argentina crises and the energetic crises which influenced expectations about the future value of this variable, however the fundamentals of the economy did not vary significantly.
In this paper we use a regime switching regression model to test the existence of bubbles in the Brazilian exchange rate. We consider the floating exchange rate period from February 1999 to February 2002 in order to capture speculative bubbles since in previous years the exchange rate bands avoid the possibility of speculation.
There are considered three structural models providing fundamental exchange rates: The first one uses the hypothesis of Purchasing Power Parity (PPP) which claims that the fundamental exchange rate must equalize the purchasing parity in Brazil and abroad. The second model uses a result from international trade, the fundamental exchange rate must equilibrate the external balance of the country. Finally the third model improves the PPP hypothesis allowing that it only holds in the long run and that the exchange rate must satisfy the nominal uncovered interest parity. We conclude that the PPP model and the third model detect that type of speculation in the economy.
Note: The downloadable document is written in Portuguese.
Keywords: testing bubbles, regime-switching, regression
JEL Classification: C51, E3
Suggested Citation: Suggested Citation