Global shocks and trade response of a commodity exporter small open economy: Terms of Trade, J-Curve and the Marshall-Lerner Condition

Marcelo Januário and Mauro Ferreira
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Marcelo Januário: LCA Consultores
Mauro Ferreira: UFMG

No 635, Textos para Discussão Cedeplar-UFMG from Cedeplar, Universidade Federal de Minas Gerais

Abstract: We evaluate the presence of the J-curve and the Marshall-Lerner condition after recognizing that terms of trade respond endogenously to global demand and supply shocks, which we identify from a structural VAR estimated with Bayesian techniques for the Brazilian economy, a small open economy with a strong commodity sector. The J-curve is not observed for total trade, capital goods, or consumption goods, but it is verified for fuel, which Brazil exports and imports. The Marshall-Lerner condition is mostly verified, but the volume exported tends not to behave as expected considering its relation to terms of trade, since global income effect plays a major role for determining the quantum exported. The volume imported reacts as expected based on its relation to terms of trade and domestic GDP, with the last appearing to play the most prominent role. The expansion in the exported volume of capital and consumption goods following an improvement in terms of trade runs against the presence of the Dutch disease, at least in the business cycle frequency.

Keywords: J-curve; Marshall-Lerner condition; terms of trade; global shocks; SVAR (search for similar items in EconPapers)
JEL-codes: F14 F41 F62 (search for similar items in EconPapers)
Pages: 28 pages
Date: 2021-08
New Economics Papers: this item is included in nep-int, nep-isf, nep-mac and nep-opm
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