A Post-Keynesian Framework for Exchange Rate Equilibrium: Simulations for the Brazilian Economy

The exchange rate is one of the most important macroeconomic variables. It directly influences trade and domestic price levels. The real exchange rate (RER) accounts for the price competitiveness of exports; the nominal exchange rate (NER), in its turn, pushes the domestic price level, affecting the achievement of the inflation target under an inflation target regime (ITR). The aim of this work is to present an RER model for external equilibrium and to assess the long-run effects of NER depreciation on inflation. The results are evaluated through simulations for the Brazilian economy. They suggest that the RER was overvalued from 2005 to 2018 and indicate that an overappreciated NER was an important tool to avoid inflation from 2005 to 2014. Therefore, under an ITR, there is no expectation to achieve an RER consistent with the current account equilibrium.