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Impacts of exchange rate non-linearity on Brazilian foreign trade

Author

Listed:
  • Lucas dos Santos Lourenço

    (Universidade Federal de Juiz de Fora)

  • Claudio Roberto Fóffano Vasconcelos

    (Universidade Federal de Juiz de Fora)

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.

Suggested Citation

  • Lucas dos Santos Lourenço & Claudio Roberto Fóffano Vasconcelos, 2019. "Impacts of exchange rate non-linearity on Brazilian foreign trade," International Economics and Economic Policy, Springer, vol. 16(4), pages 679-699, October.
    • Handle: RePEc:kap:iecepo:v:16:y:2019:i:4:d:10.1007_s10368-019-00445-2
    DOI: 10.1007/s10368-019-00445-2
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