The Brazilian Real volatility against the United States Dollar and its relationship with monetary policies and policy-related economic uncertainty events.
In this paper, I will examine the dollar-real exchange rate volatility in the period from December 1999 to April 2019 using GARCH model applied to monthly data. The reason for this research is the high instability related to the exchange rate that strikes the Brazilian economy in recent years after the Central Bank of Brazil stopped to tightly control the exchange rate. The research is justified by the fact that previous research has shown that exchange rate volatility affects variables such as investment, trade balance and growth of the country. It is verified that the exchange rate volatility is a phenomenon that has economic costs that can not be disregarded. This would be the justification for the investigations related to the possible causes of exchange rate instability. One point frequently raised in the literature is the possible relationship between monetary policy and exchange rate volatility. In the Brazilian case, the monetary policy has as the main instrument the fixing of the SELIC rate (Brazilian benchmark interest rate). In investigating the propagation of the lagged effects of shocks in this variable in the exchange rate variance, this paper will attempt to contribute to the empirical literature related to the debate about the causes of the high volatility of the exchange rate in Brazil. In this perspective, the GARCH model will be used to allow modeling at the same time means and conditional variances in a single stage. This methodology also allows the performance of causality tests of the mean and/or variance of one variable for the mean and/or variance of the other. It should be pointed out that it is not a question of identifying “how much” the mean and variance of the exchange rate respond to shocks in the SELIC since in the model used, the variance/covariance matrix is not constant. What GARCH model will allow testing whether the t-variance of a variable is affected by the lagged shocks in the mean and/or the lagged variance of another variable. Thus, the central question of the work is to investigate if interest rate shocks and their variance affect the exchange rate variance in Brazil for the period proposed. The paper will also try to explain how major events in the country may have caused a great impact on the exchange rate.
