Commodity prices and the Brazilian real exchange rate

A well documented stylized fact in commodity-exporting countries is the robust relationship between commodity prices and real exchange rates. However, empirical evidence of factors that affect the strength of the commodity price-real exchange rate connection remains inconclusive. In this paper, we investigate how structural and financial factors affect the relationship between world commodity prices and the Brazilian real exchange rate during the floating exchange rate regime. The key results show that the strength of the real exchange rate response to real commodity price fluctuations depends on the trade openness in the long run and on the country risk in the short run. Our findings provide important insights for the appropriated design of foreign exchange policy in Brazil.