As an extension of Muinhos (1998), which found a negative relationship between capital inflows and inflation in Brazil, this paper attempts to obtain the intermediate variables that connect this relationship. Based on a three-good model of Agenor and Montiel (1996) it tests the real exchange rate and government debt as the intermediate using time series' tools, such as error correction VAR, impulse response function, and Granger causality, for the period that covers from 1975 to 1994. It concludes that in a context of capital inflows, there is an appreciation of the real exchange rate that causes a decrease in wages and inflation. Another possibility is that capital inflows decrease the government debt and that reduction affects negatively inflation.
capital inflow; inflation; time series; real exchange rate
