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Current Account Sustainability in Brazil: A Non-Linear Approach

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  • Luiz de Mello
  • Matteo Mogliani

Abstract

The possibility that a country’s external current account may adjust nonlinearly to shocks is attracting increasing attention in the empirical literature. To shed further light on this issue in the context of emerging-market economies, this paper uses Brazilian data to estimate the determinants of the current account in a smooth-transition vector-autoregressive (ST-VAR) setting. We allow for the transition parameters and the model coefficients to be estimated simultaneously by non-linear constrained maximum likelihood. We find strong evidence of non-linearity in the VAR when (lagged) government consumption and investment are used as the variables governing transition across regimes. The computation of non-linear impulse response functions suggests that the system’s history, as well as the sign and magnitude of shocks, affect the current account’s responses to exogenous changes in income, government consumption and investment. In particular, responses to fiscal shocks depend on whether they are positive or negative and whether they follow periods of fiscal expansions or contractions. Current account responses to a positive fiscal impulse are much stronger when conditioned on periods of fiscal expansion (rising government consumption) than retrenchment. The importance of conditioning history and the magnitude of shocks in the current account’s response to shocks is confirmed by forecast error variance decomposition analysis. La soutenabilité du compte courant brésilien : une approche non-linéaire La possibilité que le compte courant d’un pays puisse s'ajuster non-linéairement aux chocs suscite un intéret croissant dans la littérature empirique. Dans ce document, nous nous intéressons au cas des économies émergentes. Plus précisément, nous analysons, sur données brésiliennes, les déterminants du compte courant dans le cadre de modèles vectoriels autorégressifs à transition lisse (ST-VAR). Nous estimons simultanément les paramètres de transition et les coefficients du modèle par maximum de vraisemblance non-linéairement contraint. Nous démontrons l’existence de non-linéarité dans le VAR en utilisant les dépenses publiques (retardées) du gouvernement et l’investissement comme variables de transitions entre les différents régimes. Les fonctions de réponse suggèrent que la situation budgétaire initiale, ainsi que le signe et la magnitude du choc, jouent sur la réponse du compte courant aux variations non anticipées du revenu, des dépenses publiques et de l’investissement. En particulier, les réponses à un choc positif sur les dépenses publiques sont plus fortes en période d’expansion budgétaire (croissance des dépenses publiques) qu’en période de contraction. L’intérêt de prendre en compte la situation budgétaire et la magnitude des chocs dans la réponse du compte courant est confirmé par une décomposition de la variance de l’erreur de prévision.

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File URL: http://dx.doi.org/10.1787/223518424256
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Bibliographic Info

Paper provided by OECD Publishing in its series OECD Economics Department Working Papers with number 703.

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Date of creation: 03 Jul 2009
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Handle: RePEc:oec:ecoaaa:703-en

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Keywords: smooth-transition non-linear VAR; non-linear impulse response; current account; Brazil; compte courant; Brésil; fonctions de réponse non-linéaire; modèles vectoriels autorégressifs à transition lisse;

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