Central Bank: Overoptimistic Forecasts for the Exchange Rate and Inflation

BRAZIL ECONOMICS - Report 01 Jul 2013 by Marcelo Gazzano, Cristina Pinotti and Affonso Pastore
The quality of any forecast depends on the quality of the underlying assumptions. In the Inflation Report for June, one of the Central Bank's forecasts is that inflation in 2014 will decline to 5.4%. This result is based on the assumption that the exchange rate will remain relatively stable at R$ 2.10/US$ until December 2014. Predicting the course of the exchange rate is an extraordinarily difficult task, but given the information currently available, no great effort is needed to conclude that this exchange rate hypothesis is highly unrealistic. Between 2003 and May 2012, the bet on the val...

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