An alternative methodology for testing currency crises resulting from imbalances in macroeconomic fundamentals

Abstract

This article analyses whether exchange rate pressures and speculative attacks against the Brazilian currency during the period of exchange rate anchorage resulted from imbalances in economic fundamentals. An alternative methodological approach is used to test whether the deterioration of economic fundamentals can explain the pressure put on the exchange rate during a period of crisis. The most innovative aspect of this approach lies in the development of a construct of fundamentals for the Brazilian economy that incorporates variables related to the external, fiscal and monetary sectors. The results show that macroeconomic imbalances contributed to the currency collapse that occurred in January of 1999.