Brazil-US trade balance and exchange rate: Dynamic empirics

Muhammad Mustafa, Matiur Rahman and Kishor K. Guru-Gharana ()
Additional contact information
Kishor K. Guru-Gharana: South Carolina State University, USA

Journal of Developing Areas, 2015, vol. 49, issue 3, 151-164

Abstract: Brazil and USA are important trading partners. Brazil as a resource-rich country in Latin America and a vibrant emerging economy draws enormous US trade and investment interests. Inclusion in BRICS lifts Brazil as an emerging global economic force and BRICS as a group poses economic challenges to the developed world. The Brazil-US growing trade and fluctuating Real-Dollar exchange rate are a fascinating issue of empirical exploration. The principal objective of this paper is to study the dynamics between Brazil-US nominal trade balance and nominal Real-Dollar exchange rate. Monthly data are utilized from January 1999 through December 2013 since Brazil allowed floatation of Real beginning in January 1999. They are obtained from the Direction of Trade and International Financial Statistics, published by the IMF. The standard cointegration methodology is implemented. This is appropriate since macroeconomic and financial variables are very likely to be time-variant. The application of OLS on nonstationary variables would produce misleading inferences in presence of spurious correlation. Consequently, the efficient DF-GLS and NG-Perron tests for nonstationarity and their counterpart KPSS test for stationarity are applied. All of them confirm nonstationarity of both time series variables. Stationarity in both variables is restored on first-differencing of the level data depicting I(1) behavior. Consequently, the Johansen-Juselius procedure is implemented for cointegrating relationship. Both ?max and ?trace test statistics unveil no cointegration between nominal bilateral trade balance and exchange rate. In this backdrop, VAR model is estimated, as appropriate. The evidences on short-run bidirectional causal flows are strong with significant interactive feedback effects. In the case of reverse causality, the evidences are highly insignificant. The impulse response analysis depicts the existence of short-run bilateral J-curve that shows initial deterioration in trade balance for a while following exchange rate depreciation before improvement into positive territory. In this paper, the J-curve shows that currency depreciation by Brazil against the US dollar to improve its trade balance with the USA may work only in the short run. Progressive improvement in trade balance in the long run would, in fact, depend on prudent monetary and fiscal actions to enhance Brazil’s global competitiveness through improvement in labor productivity and modern technology adoption.

Keywords: Unit Roots; Cointegration; Granger Causality; Exchange Rate; Trade Balance (search for similar items in EconPapers)
JEL-codes: F10 F14 F15 (search for similar items in EconPapers)
Date: 2015
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://muse.jhu.edu/journals/journal_of_developing_areas/v049/49.3.mustafa.html

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:jda:journl:vol.49:year:2015:issue3:pp:151-164

Access Statistics for this article

More articles in Journal of Developing Areas from Tennessee State University, College of Business Contact information at EDIRC.
Bibliographic data for series maintained by Abu N.M. Wahid ().