A BVAR Note on the J-Curve and the Marshall-Lerner Condition for Brazil

Abstract

In the present work, the hypotheses of the J-curve and the Marshall-Lerner condition for Brazil from January 2003 to December 2019 were tested. The impulse-response function (IRF) and the variance decomposition (VD) of a Bayesian vector autoregressive model (Minnesota priors) served as instruments for the empirical verification of the above-mentioned hypotheses. The Bai and Perron (1998, 2003) structural break test was carried out, which identified two breaks and, consequently, three subsamples, from January 2003 to October 2007; December 2007 to June 2015; and July 2015 to December 2019. The results showed that the estimated BVAR empirically supports the hypotheses in question. In the short term, it is observed that a real depreciation of the Brazilian currency results, in the first five months, in a deficit in the trade balance. However, as of the fourth month, the result of the trade balance becomes positive, and it remains like that for longer than ten months. This means that one cannot reject the J-curve hypothesis. For a forecast horizon of 36 months, it was found that the Marshall-Lerner condition should not be rejected either. In other words, a currency devaluation causes an increase in the trade balance for longer than three years.