Domestic Fx-Linked Debt and a Currency's Random Walk Down Sao Paulo

9 Pages Posted: 12 Apr 2005

Date Written: March 20, 2005

Abstract

Since the seminal contribution by Meese and Rogoff (1983), it is a known stylized fact that hard currencies' short-run movements can be best forecast by a random walk rather than by any model based on macro fundamentals. Emerging market currencies show features that depart significantly from those presented by hard currencies. Besides they are more volatile, official intervention is more intense and more frequent than in mature markets. This working paper asks the question on how a currency walks in Sao Paulo, Brazil's major financial centre. Specifically, it assesses the influence of currency-linked, domestic debt, on the short- and medium-term ride of the Brazilian real (BRL/USD). It finds that there is a long-term relationship between the currency price and the amount outstanding of that sort of debt, especially in the floating fx regime. In the administered fx regime, domestic fx-linked debt was more neutral and may have been an effective policy instrument.

Keywords: Dollar-linked domestic debt, exchange rates, Brazil

JEL Classification: F31, C22

Suggested Citation

Araujo Turolla, Frederico and Margarido, Mario A., Domestic Fx-Linked Debt and a Currency's Random Walk Down Sao Paulo (March 20, 2005). Available at SSRN: https://ssrn.com/abstract=689741 or http://dx.doi.org/10.2139/ssrn.689741

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