Non-linearity between exchange and prices in Brazil and implications for an economic development strategy

ABSTRACT

The objective of this article is to perform an analysis of monetary policy in Brazil, using a Markov Chain Autoregressive Vector (MS-VAR) model, in the search for evidence of non-linearity in the relationship between exchange and prices in Brazil. The analysis showed that in periods of exchange appreciation, both on the demand side and the supply side, there is a set of forces that determine a downward trajectory for price levels, suggesting that the exchange rate plays a fundamental role in the control of inflation. However, there is a need to reassess the role of the exchange rate in Brazil.

KEYWORDS:
Exchange rate; inflation; Brazilian economy; development economy