Trade Elasticities and Market Expectations in Brazil

IMF Working Papers, July 1, 2003

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Trade Elasticities and Market Expectations in Brazil

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Bibliographic details

• Authors: Claudio A Paiva
• Published: July 1, 2003
• Series: IMF Working Papers
• DOI: https://doi.org/10.5089/9781451856149.001

Summary

• Provides econometric estimates of trade elasticities for Brazil using cointegration and vector autoregression models.
• Controls included: exchange rate volatility, capacity utilization, and changes in import tariffs.
• Core results:
  • (i) Recent market expectations may have been unduly pessimistic regarding the responsiveness of Brazil's trade flows to the real exchange rate.
  • (ii) The GDP growth rates targeted by the new government may put downward pressure on the exchange rate and thus render the achievement of official inflation targets considerably more difficult if structural reforms are not implemented.

Econometric approach

• Methods:
  • Cointegration models.
  • Vector auto regression (VAR) models.
• Controls and covariates explicitly modeled:
  • Exchange rate volatility.
  • Capacity utilization.
  • Changes in import tariffs.

Key findings and interpretations

• Trade-flow responsiveness:
  • Evidence suggests greater responsiveness of Brazil’s trade flows to the real exchange rate than recent market expectations implied (see result (i)).
• Growth, exchange rate, and inflation interaction:
  • Projected or targeted GDP growth rates by the new government could exert downward pressure on the exchange rate.
  • Such exchange rate pressure could make achieving official inflation targets considerably more difficult in the absence of structural reforms (see result (ii)).

Policy implications and recommendations

• Communication and expectations:
  • Market participants’ pessimism about trade responsiveness to real exchange rate movements may be overstated; careful communication of empirical elasticities could adjust expectations.
• Structural reform urgency:
  • To reconcile higher GDP growth targets with inflation objectives, implement structural reforms that reduce the risk of exchange rate depreciation undermining inflation control.
• Trade and tariff policy:
  • Consider the role of import tariff changes and capacity utilization in shaping trade elasticities when designing trade and macroeconomic policy.

Keywords and topics covered

• Capacity utilization
• Exchange rates; Real effective exchange rates
• Exports; export elasticity; export volume
• Imports; import elasticity; import model; import volume; oil imports
• International trade; Trade; elasticities; cointegration models

Source: Trade Elasticities and Market Expectations in Brazil, Claudio A Paiva, IMF Working Papers 2003, No. 140 (July 1, 2003).

Content in this bundle

• Trade Elasticities and Market Expectations in Brazil - WP/03/140
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