This paper discusses the relationship between interest rate and the real effective exchange rate volatility in Brazil. Using a multivariate simultaneous GARCH model, allowing estimate equations for the mean and the variance in a single stage, it was observed that the real effective exchange rate volatility and interest rate (nominal or real) are not independent. Furthermore, it was found that the real effective exchange rate variance is affected by lagged shocks in the interest rate mean and variance. Under the inflation targeting regime the former results suggest that the high exchange rate volatility in Brazil could be related to the monetary policy rule adopted.
Real exchange rate volatility; Interest rate; Multivariate simultaneous GARCH models; BEKK model
