Given the wide range of macroeconomic, financial and econometric frameworks commonly used to accommodate uncomfortable empirical evidence associated with the Forex market, this article aims to model and predict the monthly variation in American Dollar-Brazilian Real exchange rate, from January 2000 to December 2009, based on asset pricing theory. Wang (2008) and Engel and West (2005) are closer to ours, in terms of fundamentals of finance, while methodologically, we are close to Chong, Chung and Ahmad (2002) and da Costa et al. (2010). Our work is relevant to the empirical literature, since the prediction results are better than the random walk approach ones. The prediction error is about 5% and 14% for the exchange rate variation and in level, respectively. In 57.5% of the changes, our model predicts the correct change direction. The main contribution based on this framework, already used to understand the Forward Premium Puzzle for advancedeconomies, consists in the derivation and the implications of a system of linear relationships characterized by a Bivariate Generalized Autoregressive Conditional Heteroskedasticity-in-Mean (GARCH-M), useful empirically, once we have extracted a time series for a Stochastic Discount Factor (SDF) able to price the covered and the uncovered trading with U.S. Government bonds. The results suggest to the theoretical literature that, at least for monthly frequency, one should not omit the temporal variation of conditional moments of the second order. The hypothesis about the lognormal distribution of discounted returns and a parsimonious specification for conditional Heteroskedastic models can influence the predictive power of SDF, as well as the effects of the inclusion of risk premium. / Diante da vasta gama de arcabouÃos macroeconÃmicos, economÃtricos e financeiros que visam acomodar evidÃncias empÃricas desconfortÃveis associadas ao mercado cambial, este artigo visa modelar e prever a variaÃÃo mensal entre as moedas real brasileiro e dÃlar americano, de janeiro de 2000 a dezembro de 2009, baseado na teoria de apreÃamento de ativos. Este estudo agrega-se à literatura empÃrica, ao obter resultados preditivos superiores a um modelo de passeio aleatÃrio, com erros de previsÃo da ordem de grandeza de 5% e 14% para depreciaÃÃo e para o cÃmbio em nÃvel, respectivamente, e um acerto em 57,5% das vezes com relaÃÃo à direÃÃo da variaÃÃo cambial. Alinhado em fundamentos a Wang (2008) e Engel e West (2005) e metodologicamente a Chong, Chung e Ahmad (2002) e da Costa et al. (2010), a principal contribuiÃÃo no uso deste arcabouÃo, jà utilizado no entendimento do Forward Premium Puzzle para economias avanÃadas, consiste na derivaÃÃo e nas implicaÃÃes de um sistema de relaÃÃes lineares caracterizado por um Generalized Autoregressive Conditional Heteroskedasticity-in- Mean (GARCH-M) bivariado, o qual pode ser testÃvel, a partir da extraÃÃo via componentes principais da sÃrie temporal para um Fator EstocÃstico de Desconto capaz de apreÃar operaÃÃes coberta e descoberta de aquisiÃÃo de tÃtulos do governo americano. Os resultados sugerem, ainda, à literatura teÃrica que, ao menos para frequÃncia mensal, nÃo se deve desprezar a variaÃÃo temporal dos momentos condicionais de segunda ordem. A hipÃtese sobre a distribuiÃÃo lognormal dos retornos descontados e uma especificaÃÃo parcimoniosa para modelos de heterocedasticidade condicional podem prejudicar a capacidade preditiva associada do Fator EstocÃstico de Desconto, assim como os efeitos da incorporaÃÃo do prÃmio de risco.

A presente dissertação de conclusão de mestrado tem por objetivo contribuir com a literatura existente que versa acerca da estimação da Taxa de Câmbio Real (RER) através de fundamentos econômicos. O objetivo deste trabalho é utilizar o instrumental teórico de modelos com mudança de regime (Markov Switching) aplicado sobre os fundamentos que determinam a RER em um modelo de Cointegração. O modelo teórico utilizado para a estimação foi o proposto por Montiel (1999), modelo este que é mais indicado para países em desenvolvimento, para o período de 1994 até 2005. Os resultados obtidos na estimação da Taxa de Câmbio Real foram contundentes em demonstrar que havia três regimes distintos (definidos como sendo regimes de estabilidade, transição e risco extremo) na determinação da RER, indicando que havia uma relação não linear entre está última e os fundamentos econômicos. Verificou-se ainda que a magnitude e os sinais dos parâmetros dos fundamentos estimados para cada regime distinto eram diferentes, sugerindo que a RER reagia de maneira distinta a choques nos fundamentos econômicos de acordo com o regime que a economia se encontrava. Os coeficientes obtidos nas estimações foram utilizados para estimar uma Taxa de Câmbio de Equilíbrio, sendo possível identificar os desvios (misalignments) da taxa observa com relação à taxa estimada a parti r de 1994. / The present dissertation aims to contribute with the studies over Real Exchange Rate in Brazil and the impact of the economic fundamentals on its determination. The main purpose of the dissertation is to use the Markov Switching framework over the fundamentals in the estimation of the Real exchange Rate to the period between 1994 and 2005, using a model based on Montiel (1999), which is more appropriate to developing countries. The results show strong evidences that there are different regimes (interpreted as stability, transition and extremely risk), which can be understood as a non linear relationship between the Real Exchange Rate and the fundamentals. In other words, it was possible to show that the impact of the fundamentals over the Real Exchange Rate is submitted to three different regimes, where the magnitude and signal of their coefficients are different in each regime. The parameters of the model were used to estimate an Equilibrium Real Exchange Rate, which was possible to demonstrate the misalignments after 1994.

Submitted by Lucas De Moura Reis (lucsreis@gmail.com) on 2013-08-27T20:52:06Z No. of bitstreams: 1 Dissertação - versão final Lucas Reis.pdf: 1558450 bytes, checksum: 422a7b41e44ddd6bb0304488e4e6a7c4 (MD5) / Approved for entry into archive by Vitor Souza (vitor.souza@fgv.br) on 2013-08-30T18:57:30Z (GMT) No. of bitstreams: 1 Dissertação - versão final Lucas Reis.pdf: 1558450 bytes, checksum: 422a7b41e44ddd6bb0304488e4e6a7c4 (MD5) / Made available in DSpace on 2013-09-19T19:51:22Z (GMT). No. of bitstreams: 1 Dissertação - versão final Lucas Reis.pdf: 1558450 bytes, checksum: 422a7b41e44ddd6bb0304488e4e6a7c4 (MD5) Previous issue date: 2012-05-23 / A forte apreciação cambial que o Brasil sofreu na última década se traduziu em um novo debate acerca da hipótese de Doença Holandesa no país. Como a queda da taxa de câmbio real ocorreu em um período de alta de preços de commodities e nos últimos anos, especialmente após a crise de 2008, vimos uma maior concentração da pauta exportadora em produtos primários, muitos economistas argumentam que a apreciação foi consequência do boom de commodities e que, em razão disso, o Brasil poderia estar sofrendo da Doença Holandesa. Este trabalho mostra que o boom de commodities não foi a principal causa da apreciação da taxa de câmbio real e não representou uma maior dependência destas mercadorias. A mudança do perfil de risco da economia brasileira foi um dos fatores mais importante para a queda da taxa de câmbio. Concluímos, portanto, que a recente perda de competitividade dos demais setores exportadores não pode ser atribuída exclusivamente à valorização das commodities. / The strong appreciation of the Brazilian currency in the last decade has resulted in a new debate on whether the economy has caught the Dutch Disease. The fall of the real exchange rate has occurred in a period of growing commodity prices and, since we have seen a greater concentration of Brazilian exports in primary goods in recent years, specially after the recent financial crisis, many economists argue that the appreciation was due to the commodity boom and that, as a consequence, Brazil could be suffering from the Dutch Disease. This paper shows that, although the relative importance of these goods in the trade balance is high, the commodity boom was not the main cause of the appreciation of the real exchange rate and did not reflect in a higher dependence on primary goods. Another determinant factor for the real exchange rate appreciation was the change in the Brazilian country risk. We therefore conclude that the recent loss of competitiveness of other export sectors cannot be exclusively attributed to the rise in commodity prices.

This thesis provides an assessment of monetary integration in the West African Monetary Zone (WAMZ) focusing upon its feasibility and trade implications, in order to inform policy about the group’s deep integration scheme. The first aspect of the original contribution of the thesis focuses on one of the main issues in the debate of the monetary union in the WAMZ, namely the degree of asymmetry in macroeconomic shocks. The study examines the real effective exchange rate (REER) behaviour among the prospective candidates to assess the degree of potential costs of giving up monetary policy autonomy. The evidence reported from VECM, impulse response and variance decomposition analysis points to heterogeneous economies. Therefore, idiosyncratic shocks imply the need for different policy responses to adjust to macroeconomic shocks. The findings strengthen the case for policy autonomy in the region. The second aspect of original contribution of the thesis evaluates the potential effect of a common currency on trade among WAMZ member countries. Using the existing currency union in ECOWAS, the CFA franc zone, the chapter estimates the effect of a common currency on bilateral trade over the period 1980-2016 using the gravity model. The main conclusion reached is that membership of the CFA franc zone has promoted bilateral trade among members by 60%. The findings support the hypothesis that a common currency increases bilateral trade, which is a helpful guide for a WAMZ monetary union. In summary, the thesis demonstrates that in the long term, a common currency would promote intra-community trade, but at present, a monetary union is not feasible due to asymmetric macroeconomic shocks. Therefore WAMZ deep integration scheme would require members instituting adequate alternative adjustment mechanisms such as fiscal transfer schemes. / Ghana Education Trust Fund (GETFund) for the financial support and Division of Economics (now Accounting, Finance and Economics Group) for the offering of the Graduate Teaching Assistant Studentship

Diese Dissertation analysiert reale Wechselkursdynamiken und die Rolle von Fiskalpolitik in einer Währungsunion, die sich aus zwei Regionen zusammensetzt. Drei Forschungsfragen werden adressiert: Welche politischen Regime führen in Abwesenheit von Handel zu determinierten Gleichgewichten? Welche Rolle spielt Arbeitsmobilität über Produktionssektoren hinweg innerhalb einer Volkswirtschaft für die Dynamik des realen Wechselkurses? Und sollte nationale Fiskalpolitik auf diese Änderungen des realen Wechselkurses, d.h. auf Inflationsdifferenziale, reagieren, um den inländischen Wohlstand zu erhöhen? Das erste Essay stellt fest, dass bei autarken Mitgliedsländern eine Geldpolitik nach Taylor-Prinzip nicht ausreicht, um ein Gleichgewicht zu determinieren, wenn sie nicht mit einer "aktiven" Fiskalpolitik gekoppelt ist. Das Modell zeigt, dass fiskalische Schocks aus der Volkswirtschaft mit einer aktiven Fiskalpolitik die Inlandsinflation beeinflussen, sich aber auch auf die Volkswirtschaft auswirken, deren fiskalische Haltung passiv ist. Das zweite Essay zeigt, dass die Annahme von perfekter Arbeitsmobilität über Produktionssektoren hinweg die Fähigkeit des Modells erheblich beeinträchtigt, ausgiebige Dynamiken des realen Wechselkurses nach sektorspezifischen Schocks zu generieren. In einer empirischen Anwendung zerlege ich die Treiber der spanischen realen Wechselkursvariabilität und zeige, dass die Schätzung der Arbeitsmobilität die Modellanpassung an die Daten erheblich verbessert. Der dritte Aufsatz erwägt reale Wechselkursschwankungen als Zielvariable für nationale Fiskalpolitiken in einer Währungsunion. Eine Wohlfahrtsanalyse, die Konsumäquivalente berechnet, quantifiziert die Vorteile von Steuerregeln, die auf das inländische Inflationsdifferenzial reagieren. Sie findet großen Spielraum für wohlfahrtsfördernde, fiskalische Interventionen im Rahmen von budgetneutralen Regeln für Konsum- und Lohnertragssteuern. / This dissertation analyses real exchange rate dynamics and the role of fiscal policy within the setting of a monetary union consisting of two regions. It seeks to address three research questions: What are the policy regimes that yield determinate equilibria in the absence of trade? What is the role of labour mobility across production sectors within an economy in real exchange rate dynamics? And should a national fiscal authority respond to these changes in the real exchange rate, i.e. the domestic inflation differential, to improve domestic welfare? The first essay finds that with autarkic member countries, a monetary authority following the Taylor principle is insufficient to render an equilibrium determinate if it is not coupled with exactly one `active' fiscal policy. The model shows that fiscal shocks originating in the economy with an active fiscal stance affect domestic inflation but also spill over into the economy whose fiscal policy stance is passive. The second essay shows that assuming perfect labour mobility across production sectors significantly hampers the model's ability to generate rich real exchange rate dynamics following sector-specific shocks. In an empirical application, I decompose the drivers of Spanish real exchange rate variability and show that estimating the degree of labour mobility considerably improves the model's fit to the data. The third essay considers real exchange rate variability as a fiscal target for national fiscal authorities in a monetary union. A welfare analysis that calculates consumption equivalents quantifies the benefits of fiscal rules that are responsive to the domestic inflation differential. It finds a large scope for welfare-enhancing fiscal intervention in the set of budget-neutral rules which rely on consumption and labour income taxes.

Dans ce travail, nous analysons et comparons les comportements de localisation de trois différentes formes d'investissements durables (les greenfields seuls, les investissements directs étrangers totaux (IDE) et les investissements productifs intérieurs). Parmi un groupe de déterminants, dont une large partie est inspirée de la littérature empirique existante, nous étudions tout particulièrement le rôle que joue le taux de change réel sur l'attractivité des territoires vis-à-vis de chacun de ces investissements. Un tel examen est opéré à partir d'une économétrie de données de panel. Il consiste à tester un modèle de référence sur les greenfields, les IDE totaux ainsi que sur les investissements productifs – avec des spécifications adaptées à chaque cas – et à interpréter l'ensemble des résultats et en particulier les écarts obtenus. Pour appréhender les variables dépendantes, nous nous appuyons sur les séries statistiques de la CNUCED et de l'OCDE, ainsi que sur celles du FDI Markets (Financial Times), et de l'European Investment Monitor (Ernst & Young) qui ont jusqu'à présent été peu exploitées, voire ignorées, par les études portant sur le sujet. Plusieurs échantillons (global, européen et OCDE) et plusieurs périodes (2004-2010, 1998-2010, 1995-2010) sont retenus en fonction de la disponibilité des données. Nos résultats indiquent que les greenfields, les IDE totaux (et donc, par déduction, les fusions-acquisitions) et les investissements productifs répondent à des critères de localisation bien différents correspondant à leurs caractéristiques propres. L'impact qu'exerce notamment le taux de change réel sur chacun de ces capitaux est des plus intéressants. De faibles prix relatifs apparaissent ainsi comme attirant de façon sensible les investissements productifs, qu'ils soient d'origine domestique ou étrangère (greenfields). En revanche, il semble que ces prix relatifs n'aient aucune influence sur les recompositions transnationales de capital, déduites à partir des IDE totaux. / In this work, we analyze and compare locational behavior of three forms of durable investments (greenfields, foreign direct investments, and internal productive investments). Among a group of determinants, mainly inspired by the existing empirical literature, we study more particularly the role played by the real exchange rate on countries' attractiveness towards each of those investments. Panel data econometrics is used for this study. We test a basis model on greenfields, total FDIs, and on productive investments – with specifications adapted to each case – and then analyze the results, particularly when they show differences. In order to proxy the dependent variables, we use the UNCTAD and the OECD's data series, as well as the FDI Markets (Financial Times) and the European Investment Monitor (Ernst & Young) which have somehow been ignored by the studies on the subject until now. Several samples (global, European and OECD) and several periods (2004-2010, 1998-2010 and 1995-2010) are analyzed depending on data availability. Our results prove that greenfields, total FDIs (and mergers and acquisitions by deduction), and productive investments respond to different location criteria according to their characteristics. In particular, the impact of the real exchange rate on each of those investments is very interesting. While low relative prices attract significantly productive investments, financed by domestic or foreign multinational companies (greenfields), they don't seem to have any impact on mergers and acquisitions (deduced from total FDIs).

The thesis focuses on the question of undervaluation of the renminbi exchange rate to the U.S. dollar from the perspective of three selected alternative methods of calculating long term equilibrium exchange rate. In the case of calculations of behavioral equilibrium exchange rate and the natural real exchange rate, I performed calculations by using vector error correction model. In the case of fundamental equilibrium exchange rate I used error correction model. The input data used in the models are ranging from 1980 to 2010. Those are primarily value of nominal exchange rates, price levels and foreign trade. According to my results behavioural and fundamental equilibirum exchange rate show undervaluation of the renminbi to the year 2010, while the natural real exchange rate indicates a slight overvaluation of the renminbi to the year 2010.

How do financial variables, such as firms’ cash flow and banks’ capital, affect macroeconomic variables, such as investment and GDP growth? What are the macroeconomic effects of exchange rate depreciation in countries where firms and households have extensive foreign-currency liabilities? The doctoral thesis Empirical Essays on Macro-Financial Linkages consists of four separate papers in the field of empirical macroeconomics. The first three papers investigate the macroeconomic implications of financial-market imperfections. Imperfect information between borrowers and lenders makes it more costly for firms to finance investments with external funds than with internal funds. The external finance risk premium depends on the strength of firm balance sheets, which hence affects firm investment. The first paper, The Effect of Cash Flow on Investment: An Empirical Test of the Balance Sheet Channel, examines the importance of financial constraints for investment using a large Swedish firm-level data set which includes many smaller firms (where balance sheet effects are likely to be especially important). I find a positive effect of cash flow on investment, controlling for fundamental determinants of investment and any information in cash flow about investment opportunities. As predicted by the balance sheet channel, the estimated effect of cash flow on investment is especially large for firms which, a priori, are more likely to be financially constrained (low-dividend, small and non-group firms). Moreover, the investment-cash flow sensitivity is significantly larger and more persistent during the first half of the sample period, which includes a severe banking crisis and recession. The second paper, Credit Matters: Empirical Evidence on U.S. Macro-Financial Linkages, written jointly with Tamim Bayoumi, estimates the impact of an adverse shock to bank capital on credit availability and spending in the United States, allowing for feedback from spending and income through the balance sheets of banks, firms and households. We find that an exogenous fall in the bank capital/asset ratio by one percentage point reduces real GDP by some 1 ½ percent through its effects on credit availability, while an exogenous fall in demand of 1 percent of GDP is gradually magnified to around 2 percent through financial feedback effects. The third paper, The Effects of Real Exchange Rate Shocks in an Economy with Extreme Liability Dollarization, studies the effects of real exchange rate depreciation in Bolivia, where over 95 percent of bank credit is denominated in dollars. Currency depreciation increases the domestic-currency value of foreign-currency liabilities and the debt service burden, thus adversely affecting firm balance sheets. A key issue for policymakers in countries with widespread foreign-currency borrowing is whether depreciation would have the standard, expansionary effect on output, or if an adverse balance sheet would dominate. I find that real exchange depreciation has negligible effects on output, since a contractionary balance-sheet effect on investment is counteracted by the standard expansionary effect on net exports. The fourth paper, Uncovered Interest Parity in a Partially Dollarized Developing Country: Does UIP Hold in Bolivia? (And If Not, Why Not?), studies another aspect of macro-financial linkages. The so-called uncovered interest parity (UIP) condition states that interest rate differentials compensate for expected exchange rate changes, equalizing the expected returns from holding assets which only differ in terms of currency denomination. Because of data availability problems, there is a lack of empirical tests of UIP for developing countries. The paper studies the case of Bolivia, where there are bank accounts which only differ in terms of currency denomination (bolivianos or U.S. dollars). I find that UIP does not hold in Bolivia, but that the deviations are smaller than in most other studies of developed and emerging economies. / Diss. Stockholm : Handelshögskolan, 2009 Sammanfattning jämte 4 uppsatser

Cette thèse s’intéresse au défi que représente le rattrapage des niveaux de prix pour la stabilité macroéconomique des pays en transition d’Europe centrale et orientale, dans la perspective de leur future participation à la zone euro. A cet égard, une modélisation du taux de change réel d’équilibre suggère que l’appréciation réelle liée au rattrapage économique recouvre des évolutions de prix relatifs différentes suivant les régimes de change, dont témoignent des trajectoires d’endettement extérieur contrastées. Dans les économies en changes flexibles, la hausse du taux de change nominal favorise une appréciation endogène des termes de l’échange à moyen terme, en orientant les investissements directs étrangers et la réalisation des gains de productivité vers le secteur exposé de l’économie, ce qui se traduit par une appréciation du taux de change réel d’équilibre et une amélioration des comptes extérieurs. Dans les économies en changes fixes, les effets de valorisation liés à la hausse des prix relatifs domestiques tendent à orienter les investissements vers le secteur abrité de l’économie, entraînant une érosion de la compétitivité extérieure, dont témoigne le gonflement de la dette externe. Par ailleurs, l’intégration monétaire comporte des risques spécifiques pour la stabilité macroéconomique des économies en rattrapage, dans la mesure où elle s’accompagne d’un processus marqué de convergence des conditions de financement entre Etats membres, dès lors que la perspective de l’adhésion à l’espace monétaire commun devient crédible. Un modèle dynamique à anticipations rationnelles permet de montrer que face au choc de demande lié à une telle convergence financière, l’appréciation du taux de change nominal se révèle cruciale pour limiter la surchauffe de l’économie. A l’inverse, dans les économies en régime de change fixe, l’abaissement des primes de risque pays est susceptible de provoquer une montée de l’endettement extérieur, suivi d’enchaînements déflationnistes une fois dans l’union monétaire. / This research investigates the challenges of price level catching-up for macroeconomic stability in Central and Eastern European transition countries seeking to enter the Euro area. In this respect, an equilibrium real exchange rate model suggests that the process of real appreciation observed along economic catching-up in these countries can be ascribed to different relative price developments, depending on the exchange rate regime, as exemplified by contrasted external debt trajectories. In flexible exchange rate economies, the increase in the nominal exchange rate fosters an endogenous appreciation of the terms of trade in the medium run, by channelling foreign direct investment and associated productivity gains to the exposed sector of the economy, thus appreciating the equilibrium real exchange rate and strengthening the current account over time. In fixed exchange rate economies, positive valuation effects associated with the increase in domestic relative prices tend to divert investment to the sheltered sector, thus undermining external competitiveness and bringing about higher external debt. Furthermore, monetary integration entails specific risks for macroeconomic stability in catching-up economies, because it implies a process of rapid convergence in the financing conditions across member States, which takes place as soon as the perspective of accession to the common monetary area appears credible. A dynamic, rational expectations model shows that the appreciation of the nominal exchange rate becomes crucial to curtail the economic overheating triggered by the demand shock associated with financial convergence. By contrast, diminishing country risk premia under fixed exchange rate regimes are likely to cause ‘boom bust’ cycles, with an increase in external indebtedness followed by deflationary developments once in the monetary union.

Submitted by Nicole de Mendonça Saba (nicolesaba@gmail.com) on 2015-09-24T17:21:52Z No. of bitstreams: 1 Nicole Saba versao final_vf.pdf: 1360650 bytes, checksum: aafa0056ed232ccdb36bda0393568740 (MD5) / Approved for entry into archive by Renata de Souza Nascimento (renata.souza@fgv.br) on 2015-09-24T17:28:57Z (GMT) No. of bitstreams: 1 Nicole Saba versao final_vf.pdf: 1360650 bytes, checksum: aafa0056ed232ccdb36bda0393568740 (MD5) / Made available in DSpace on 2015-09-24T17:33:40Z (GMT). No. of bitstreams: 1 Nicole Saba versao final_vf.pdf: 1360650 bytes, checksum: aafa0056ed232ccdb36bda0393568740 (MD5) Previous issue date: 2015-08-19 / Este trabalho procura identificar quais variáveis são as mais relevantes para previsão da taxa de câmbio real do Brasil e analisar a robustez dessas previsões. Para isso foram realizados testes de cointegração de Johansen em 13 variáveis macroeconômicas. O banco de dados utilizado são séries trimestrais e compreende o período de 1970 a 2014 e os testes foram realizados sobre as séries combinadas dois a dois, três a três e quatro a quatro. Por meio desse método, encontramos nove grupos que cointegram entre si. Utilizando esses grupos, são feitas previsões fora da amostra com a partir das últimas 60 observações. A qualidade das previsões foi avaliada por meio dos testes de Erro Quadrático Médio, teste de Diebold-Mariano e, além disso, foi utilizado um modelo de passeio aleatório do câmbio real como benchmark para o procedimento de Hansen. Todos os testes mostram que, à medida que se aumenta o horizonte de projeção, o passeio aleatório perde poder preditivo e a maioria dos modelos são mais informativos sobre o futuro da o câmbio real efetivo. O horizonte é de três a quatro anos à frente. No caso do teste de Hansen, o passeio aleatório é completamente eliminado do grupo final de modelos, mostrando que é possível fazer previsões superiores ao passeio aleatório. / This paper seeks to identify which variables are most relevant to forecast Brazil's real exchange rate and also analyze the robustness of the results. To that end, we conducted Johansen cointegration tests on 13 different variables. The database covers the period of 1970 to 2014 with quarterly frequency. The series were combined in subsets of two, three and four variables. After conducting the Johansen cointegration test, we found that nine different groups that are cointegrated. We then proceed to estimate out-of-sample forecasts of the real exchange rate for each of these nine groups. Once we have these forecasts, we evaluate their quality by calculating their mean squared errors and conduct the Diebold-Mariano Test. We also use a random walk model of the exchange rate as benchmark for Hansen's model confidence set. All of the tests show that, as we expand the forecast horizon, the random walk series' predictive power is far worse than the other forecasts. In the case of Hansen's model confidence set, the random walk series is eliminated from the final confidence set of models. The time horizon is three to four years, which gives us evidence of forecast accuracy gains superior to the random walk model for the exchange rate in the long term.