Book contents
- Frontmatter
- Contents
- List of figures
- List of tables
- List of contributors
- Acknowledgements
- URL disclaimer
- 1 Introduction: the transmission mechanism and monetary policy
- 2 Are the effects of monetary policy in the euro area greater in recessions than in booms?
- 3 Supply shocks and the ‘natural rate of interest’: an exploration
- 4 Some econometric issues in measuring the monetary transmission mechanism, with an application to developing countries
- 5 Central bank goals, institutional change and monetary policy: evidence from the United States and the United Kingdom
- 6 The transmission mechanism of monetary policy near zero interest rates: the Japanese experience, 1998–2000
- 7 What does the UK's monetary policy and inflation experience tell us about the transmission mechanism?
- 8 Modelling the transmission mechanism of monetary policy
- 9 Empirical evidence for credit effects in the transmission mechanism of the United Kingdom
- 10 Uncovered interest parity with fundamentals: a Brazilian exchange rate forecast model
- 11 Uncovered interest parity and the monetary transmission mechanism
- Bibliography
- Index
10 - Uncovered interest parity with fundamentals: a Brazilian exchange rate forecast model
Published online by Cambridge University Press: 22 September 2009
- Frontmatter
- Contents
- List of figures
- List of tables
- List of contributors
- Acknowledgements
- URL disclaimer
- 1 Introduction: the transmission mechanism and monetary policy
- 2 Are the effects of monetary policy in the euro area greater in recessions than in booms?
- 3 Supply shocks and the ‘natural rate of interest’: an exploration
- 4 Some econometric issues in measuring the monetary transmission mechanism, with an application to developing countries
- 5 Central bank goals, institutional change and monetary policy: evidence from the United States and the United Kingdom
- 6 The transmission mechanism of monetary policy near zero interest rates: the Japanese experience, 1998–2000
- 7 What does the UK's monetary policy and inflation experience tell us about the transmission mechanism?
- 8 Modelling the transmission mechanism of monetary policy
- 9 Empirical evidence for credit effects in the transmission mechanism of the United Kingdom
- 10 Uncovered interest parity with fundamentals: a Brazilian exchange rate forecast model
- 11 Uncovered interest parity and the monetary transmission mechanism
- Bibliography
- Index
Summary
Introduction
Forecasting the nominal exchange rate path is one of the most challenging aspects of an inflation-targeting framework. According to Bank of Brazil estimates, the pass-through from nominal exchange rate movements to inflation is around 10% in each quarter. Therefore, an accurate forecast of the nominal value of the currency is very important for the efficiency of an inflation-targeting regime. If the evaluation of the future exchange rate path can be made more precise, it may reduce the variance in output and inflation.
Uncovered interest parity (UIP), which relates the expected nominal depreciation to the nominal interest rate differential, has been a popular model for exchange rate forecasting. But UIP has been questioned as an adequate tool to forecast future exchange rates because many empirical tests have found a negative correlation between exchange rate changes and the interest differential, in contradiction to what is predicted by UIP. This situation has led us to consider what can be gained and lost with other models for forecasting the exchange rate.
A simple alternative is to assume that the exchange rate follows a random walk and is not cointegrated with any exogenous variable for which we have data. The expected future exchange rate therefore should be equal to the current value. This first approach, although simple and transparent, does not preclude the risk of occasional large forecast errors in the exchange rate and hence inflation.
- Type
- Chapter
- Information
- Monetary Transmission in Diverse Economies , pp. 191 - 207Publisher: Cambridge University PressPrint publication year: 2002