Conventions and the exchange rate: an application of the Harvey’s Model to Brazil

Abstract

This article offers two contributions to the literature on the subject of exchange
rate determination. In the theoretical field, we elaborate the channel through which structural factors, of a lasting nature, influence the formation of the exchange rate based on their effects
on the short-term determinants of this rate, within the scope of the Harvey’s model (2009)
. In the empirical field, we estimate an exchange rate equation for Brazil, for the period 1996-
2022, aiming to investigate the adherence of the Harvey’s model (2009) to the Brazilian case.
The Autoregressive Distributed Lag Model (ARDL) with the Error Correction Term (TCE) was
adopted as an estimation method using quarterly data. The results found suggest the relevance
of conventions, expectations, and financial flows, as well as the short-term and speculative bias
of foreign exchange market agents, in determining the exchange rate.

JEL Classification: E12; F31; F32.