Monetary system refers to instrument adopted by a country or an economic block for facilitating exchange. The monetary system is the means of generating and measuring debt and wealth in financial markets. Currency is the main tool used in monetary system, for measuring economic value. Other means of payments include checks, credit cards and debit cards. The momentary system also describes the economic approach adopted by government with respect to currency exchange market. There are two approaches to currency exchange market operations; fixed rate and floating rate. The Brazilian currency is called the Real (BRL/ R$) and has adopted floating exchange model.
The Real (R$) is equal to 100 centavos. Brazil has adopted “a floating regime combined with inflation targeting “(Holland, 279), since 1999. In particular, Brazil uses the “impulse stochastic control model” (Silva, 3), to regulate the currency exchange rate. The government does not directly control the exchange rate of the R$ against other currencies but rather employ fiscal policies such as increasing foreign currency holdings by the Brazil Central Bank to mitigate currency exposure. The Stochastic control model provides the monetary regulating authority with two options of indirect exchange rate coordination. These are continuous adjustment of interest rate and impulsive activity in foreign exchange market as well as trading in bond market. It is apparent that the Brazilian monetary policy is more focused on controlling inflation rate rather than regulation of the currency exchange rate.
The adoption of floating exchange rate which is combined with Stochastic Control Model is probably informed by the need to mitigate misalignment of currency. In addition, this model promotes the flow of foreign investment due increased investors’ confidence attributable to deregulation of currency market (Williamson, 3). It has also strengthened the R$ against major world currencies. However, it is important for the country to consider targeting of the currency exchange rate with endorsement from international financial institutions such as the World Bank, the IMF and the European Union. This would enhance credibility in R$ and promote the country’s ability to overcome attempts to overvalue or undervalue it in international financial dealings.
Risk to Brazilian currency
The major currency risks facing the Brazilian are the expected devaluation as the world moves towards the targeted exchange rate and probability of actual currency depreciation exceeding the projected depreciation. These are mainly currency market risks and have positive correlation to bonds value and credit cost. These pose the challenge of increasing the accessibility of credit by reducing the cost which is necessary for promoting domestic investment (Goldfajn, Hennings and Mori, 35). The transformation of the international shift to multiple currency where other currencies substitute the US $ as mode of payment, the exchange rate is bound to become more volatile. This constitutes a potential risk to the R$. In addition increased currency rivalry among international players such as China and the US pose another risk to the Brazilian currency if the global financial structure governance is not stabilized (Dailami and Masson, 1).
Therefore it is important for Brazil to prevent currency volatility through enhanced cooperation with other countries in currency market regulation and monetary policy integration. Despite the risk associated with the currency, it has largely appreciated as a result of inflows from developed countries where investors are look for alternative markets to evade the growing risks. It is expected that this will continue to strengthen the country competitiveness in export trade. An assessment of the Brazilian exchange and interest indicates “that Brazil has not suffered from the fear of floating and that the Brazilian Central Bank does not care about exchange rate dynamics as much as it does about inflation.”(Holland, 1).
Works cited
Holland, Marcio. “Exchange rate volatility and the fear of floating in Brazil.”EconomiaA, Selecta, Brasilia, V0l 7 (2), p. 279-292, 2006. Web
Silva, Antonia Francis. “Brazilian strategy for managing the risk of foreign exchange rate exposure during a crisis” Banko Central Do Basil Working Series Paper, 207, 2010. Web
Dailami Mansoor and Masson Paul. Brazil: The new multi-polar monetary system. The World Bank Group, 2010. Web
Goldfajn Ilan, Hennings Katherine and Mori Helio. “Brazil’s financial system: Resilience to shocks, no currency substitution, but struggling to promote growth.”Center for Research on Economic Development and Policy Reform, Working Paper 170. Web, 35
Williamson John. “The exchange rate in Brazil.” Working Paper, the Peterson Institute for International Economics.2010. Web
