IS THE BRAZILIAN REAL A COMMODITY CURRENCY? LARGE SAMPLE EMPIRICAL EVIDENCE

Brazil is one of the world's largest base materials exporters, and this paper examines through large time series samples whether the Brazilian Real can be characterized as a commodity currency. The Real/US dollar real exchange rate and a real commodity prices index are found to be non-stationary and not co-integrated, while a risk premium appeared to have a large and statistically significant long term relationship with exchange rate movements. Combined first difference models showed that real exchange rate elasticity to risk premium is twice as large as to commodity prices, although both variables have considerable influence. Some specifications outperformed a random walk model with respect to root mean square forecast errors for many horizons, but the latter still better determined the exchange rate in longer terms. [PUBLICATION ABSTRACT]