Oil price shocks and global liquidity: macroeconomic effects on the Brazilian real exchange rate

This paper examines the effects of the interaction between the oil market and measures of global liquidity on the Brazilian real exchange rate against the U.S. dollar, using an SVAR framework. The results show that approximately 16\% of the variance of the real exchange rate is associated with oil-specific demand shocks in the long run. Supply and aggregate demand shocks are less important. The recovery of the Brazilian real exchange rate in the aftermath of the global financial crisis is more related to advanced economies' liquidity than oil prices. Oil price changes affect the interest rate spread, which puts further pressure on the real exchange rate. Our results shed light on the impact of oil price shocks on the Brazilian economy by providing important insights into the foreign exchange policy in Brazil.