Oil price shocks and the Brazilian real exchange rate
Description
This paper examines the effects of oil price changes on the Brazilian real exchange rate against the U.S. dollar, using an SVAR framework able to disentangling oil supply and demand shocks, as well as international liquidity shocks. The results show that when we take into account measures of international liquidity in the model, approximately 11\% of the variance of the Brazilian real exchange rate, in the long run, is associated with oil-specific demand shocks. Supply and aggregate demand shocks are less important. Including measures of international liquidity reduces the contribution of oil-specific demand shocks on the real exchange rate in the aftermath of the global financial crisis of 2008. Oil price changes affect the interest rate spread, which puts further pressure on the real exchange rate. Our results shed light on the impact of oil price shocks on the Brazilian economy by providing important insights for the foreign exchange policy in Brazil.
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Institutions
- Universidade Federal de Vicosa