Are foreign exchange rate shocks affecting the trade balance? An empirical analysis of Brazil, the Eurozone, Japan and United States between 2000 and 2012

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Volume Title

School of Business | Master's thesis

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Date

2016

Department

Taloustieteen laitos
Department of Economics

Major/Subject

Kansantaloustiede
Economics

Mcode

Degree programme

Language

en

Pages

92

Series

Abstract

It is generally known that a devaluation of a currency leads to increased exports. This assump- tion might be tempting for policymakers to utilize. If many decision making entities are tempted to exploit the phenomenon simultaneously, it is likely that there is an outbreak of competitive deval- uations or a currency war. I have studied how the real exchange rate affects the Net Exports to Gross Domestic Product ratio in order to justify whether or not a country can benefit by devaluat- ing the value of its currency or if a country is prone to suffer from exchange rate shock that origi- nate from abroad. The study consists of four different economic areas that have their own curren- cies. The country set consists of Brazil, the Eurozone, Japan and United States. The analysis was conducted using quarterly data from a time-frame that starts in the first quarter of year 2000 and ends in the third quarter of year 2012. The main result of the analysis is that only two countries out of the four show significant results. Japanese Net Export to GDP ratio is marginally significant and responds positively to depreciation of the Yen. The result for Brazil is strongly significant and depreciation of the Brazilian Real has a positive effect on the Brazilian exports. This observation provides insight to the accusations of a currency war made by Brazilian politicians in 2010. The results suggest that studying the Brazilian economy in more detail would provide substantial ground for future research. All in all, I came to a conclusion that the presence of an all-out currency war is unlikely as there are institutions like the IMF established to prevent such an outcome.

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Keywords

exchange rate, IS-LM, J-curve, VAR

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https://urn.fi/URN:NBN:fi:aalto-201801181125

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[gradu] Kauppakorkeakoulu / BIZ