Testing nonlinearities between Brazilian exchange rate and inflation volatilities

Abstract

There are few studies, directly addressing exchange rate and inflation volatilities, and lack of consensus among them. However, this kind of study is necessary, especially under an inflation-targeting system where the monetary authority must know well price behavior. This article analyses the relation between exchange rate and inflation volatilities using a bivariate GARCH model, and therefore modeling conditional volatilities, fact largely unexplored by the literature. We find a semi-concave relation between those series, and this nonlinearity may explain their apparently disconnection under a floating exchange rate system. The article also shows that traditional tests, with non-conditional volatilities, are not robust. Existem poucos estudos

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