Question

Consider the extent to which fiscal policy actions can influence the real income level of a small open economy with imperfect capital mobility and a fixed exchange rate. Explain how the Central Bank of Brazil could utilize its own foreign exchange reserves to prevent Brazil’s sovereign wealth fund from preventing changes in the real’s value in foreign exchange markets?

Answer 1

Explanations

Brazil's Sovereign wealth fund is a type of sovereign wealth fund derived from the countries own wealth fund. The government of Brazil founded the sovereign fund of Brazil with a initial target of $20 million. The purpose of the sovereign wealth fund is to benefit the countrys economy and citizens, basically sovereign wealth fund is derived from the central bank of Brazils budget fund and trade surplus or revenue generated from the countrys natural resources. UAE also has a large sovereign fund, which comes from countries oil reserves.

How Cental Bank of Brazil utilize foreign exchange reserves to protect Brazils sovereign wealth fund

• Brazils foreign exchange reserves are was measured in terms of US dollar.   Foreign exchange reserves are   the reserves held by the central bank in foreign currencies. In other words foreign exchange reserves are the sum of foreign currency reserves and other reserve assets, which include other financial instruments denominated in foreign currency,
• The international reserve management of Brazil is based on the highly controlled governance comprises of daily performance control and evaluation system and investment monitoring . Evaluation also comprises of market risk,credit risk, liquidity  risk, etc.
• The depreciation of Brazilian Real has the US Dollar  has a strong positive correlation with the increase of the US Dollar index