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Impacts of exchange rate non-linearity on Brazilian foreign trade

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Abstract

The possibility of exchange rate appreciations and depreciations affecting macroeconomic variables has recently been rising in popularity in empirical international economics. Indeed, several theoretical studies have pointed out that exporters may behave diversely when facing different directions and sizes of exchange rate fluctuations. The empirical literature for the Brazilian case on this issue is still scarce. Thus, the aim of this paper is to investigate the effects of exchange rate non-linearity on the flow of international trade of disaggregated Brazilian exports and imports for five major trading partners. For this purpose, the non-linear autoregressive distributed lag (NARDL) methodology is applied to traditional trade equations. The results reveal, among other things, that exchange rate non-linearity shows a better response to the models (in terms of statistical significance and expected signs of estimated elasticities) regarding Brazilian imports. Therefore, a conclusion concerning the exchange rate policy is that an incentive for exports resulting from an over-depreciated exchange rate may actually have a greater impact on imports by discouraging them, which is an outcome with possible policy implications. Moreover, the results have remarkable applications since exchange rate appreciations did not seem to decrease exports by a significant amount, as was argued to be the case after the period of overvaluated currency in the 2000s.

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Notes

  1. 1.

    Ministry of Development, Industry and Foreign Trade.

  2. 2.

    Nomenclatura Comum do Mercosul (Common Nomenclature of Mercosul), which is based on the Harmonized System (HS).

  3. 3.

    Many works have broadly surveyed this literature. For the early trade models, see Cheng (1959), Leamer and Stern (1970) and Taplin (1967).

  4. 4.

    See Marston (1990), Dornbusch (1987) and Krugman (1987).

  5. 5.

    See Baldwin (1990).

  6. 6.

    In this case, one assumes that the country does not influence international prices. Therefore, the price elasticity of the foreign demand for domestic goods is taken as infinite, and only the price elasticity of the supply of exports is investigated. Thus, a rise in the supply of exports cannot affect their prices and every demand side factor is said to be captured by variations in the prices.

  7. 7.

    A structural supply equation assigns the exports as a function of relative prices and the gap between actual and full capacities.

  8. 8.

    The chapters are the two-digit disaggregation of the Harmonized System. There are 97 chapters listed. See section 3.2.

  9. 9.

    PSS is the usual abbreviation used in the literature for the work of Pesaran et al. (2001), which we also call Pesaran et al. (2001).

  10. 10.

    See also Narayan (2005).

  11. 11.

    Source: Own calculation based on AliceWeb – MDIC.

  12. 12.

    Ministry of Industry, Foreign Trade and Services.

  13. 13.

    Method Census X12.

  14. 14.

    For Argentina, the data are the EMI (Estimador Mensual Industrial). For China, the quarterly GDP series was transformed into a monthly series, performed by the cubic spline interpolation.

  15. 15.

    The following HS chapters of exports to China were cut and had less than 201 observations: 02, 15, 47 and 88. This feature in the China trading data was expected because China entered the WTO only in 2001. The growth in some of its trading flows is still a recent episode.

  16. 16.

    The complete results of the tests are omitted and can be obtained from the authors. Tests based on Dickey and Fuller (1979), Ng and Perron (2001) and Lee and Strazicich (2003).

  17. 17.

    The results for the diagnostic tests are not shown in the text and are available in Appendix B, panel C.

  18. 18.

    All our analyses are based on the cointegrating equations. The others were thus discarded and are available from the authors.

  19. 19.

    As some chapters have long names, we refer to them in a simplified manner. Their full descriptions are displayed in Appendix A.

  20. 20.

    A total of 213 out of 312 equations and 42 out of 48 equations.

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Correspondence to Lucas dos Santos Lourenço.

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Lourenço, L.S., Vasconcelos, C.R.F. Impacts of exchange rate non-linearity on Brazilian foreign trade. Int Econ Econ Policy 16, 679–699 (2019). https://doi.org/10.1007/s10368-019-00445-2

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Keywords

  • Exchange rate
  • Non-linearity
  • NARDL
  • Cointegration
  • Exports
  • Imports

JEL codes

  • F14
  • F49
  • C32