chapter  15
18 Pages

The Brazilian experience in managing the interest-exchange rate nexus

WithRicardo Carneiro, Pedro Rossi

This chapter addresses four main questions. First, it discusses the theoretical background of the interest-exchange rate nexus. Second, it attempts to explain why the interest rate in Brazil is so high. Third, it describes Brazil's foreign exchange markets, their size and hierarchy. Fourth, it explains the carry trade's dynamics in different foreign exchange markets and also the government's policies to curb it. The concluding remarks put forward some recommendations to improve the regulation of the foreign exchange market. In addition, this operation has been one of the main forces driving the Brazilian real appreciation, as shown in Rossi. In the Brazilian future market, the carry trade assumes the form of a sale of future dollar. In other words, the sale of future dollars is equivalent to incurring a debt in dollars and acquiring a fixed-income asset in Brazilian reals. In the recent past, Brazilian government has been trying hard to curb the real appreciation and its volatility, with reasonable success.