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Terms-Of-Trade Fluctuations And Their Implications For Exchange- Rate Coordination In Mercosur

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  • Nelson H. Barbosa-Filho

    (Institute of Economics, Federal University of Rio de Janeiro)

Abstract

This paper presents the correlation between the annual fluctuations of the terms of trade of Brazil, Argentina, Uruguay and Paraguay. The period under analysis is 1980-2001 and the main findings are that the four countries have a high to moderate synchronization of their export prices, a moderate to low synchronization of their import prices, and a low synchronization of their terms of trade. The small positive correlation between the growth rates of the terms of trade of Brazil and Argentina (0.24) support exchange rate coordination between the two countries, provided that their bilateral real exchange rate is allowed to fluctuate temporarily to accommodate possible differences between the intensity of shocks across them. For instance, given an adverse shock to Brazil, both the Brazilian and Argentine real exchange rates against the rest of the world (domestic good per unit of foreign good) should increase to avoid a reduction, or smooth the variation, of their trade balances, but the Argentine currency should appreciate against the Brazilian currency in real terms because Argentina tends to be less affected by the shock. The observed correlations indicate that, through a joint and flexible managed float of their currencies, Argentina and Brazil may be able to share the benefits and costs of terms-of-trade shocks without imposing major macroeconomic disruptions on each other. In such an arrangement and also based on the observed correlations, Uruguay may either follow Argentina, when the terms-of-trade shock is more intense to Brazil, or do nothing, when the shock is more intense to Argentina. In contrast, Paraguay should follow Brazil, when the terms- of-trade shock is more intense to Argentina, or do nothing, when the shock is more intense to Brazil. Because of the low correlation between the terms-of-trade fluctuations of Brazil and Argentina, the best form of exchange-rate coordination for the near future seems to be a Mercosur version of the European Monetary System of 1979-98, that is, a wide interval of fluctuation for the regional currencies around a common and competitive real exchange rate against the rest of the world.

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Bibliographic Info

Paper provided by EconWPA in its series International Trade with number 0503002.

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Length: 26 pages
Date of creation: 04 Mar 2005
Date of revision: 22 Mar 2005
Handle: RePEc:wpa:wuwpit:0503002

Note: Type of Document - pdf; pages: 26
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Web page: http://128.118.178.162

Related research

Keywords: Mercosur; Trade; Exchange-Rate Coordination;

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References

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  1. Barry Eichengreen., 1998. "Does Mercosur Need a Single Currency?," Center for International and Development Economics Research (CIDER) Working Papers C98-103, University of California at Berkeley.
  2. Giancarlo Corsetti & Paolo Pesenti, 2002. "Self-Validating Optimum Currency Areas," NBER Working Papers 8783, National Bureau of Economic Research, Inc.
  3. Frankel, Jeffrey A & Rose, Andrew K, 1996. "The Endogeneity of the Optimum Currency Area Criteria," CEPR Discussion Papers 1473, C.E.P.R. Discussion Papers.
  4. Nelson H. Barbosa-Filho, 2005. "Trends And Fluctuations In Brazilian And Argentine Trade Flows," International Trade 0503001, EconWPA.
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Cited by:
  1. Nelson H. Barbosa-Filho, 2005. "Trends And Fluctuations In Brazilian And Argentine Trade Flows," International Trade 0503001, EconWPA.

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