Testing the Effects of Real Exchange Rate Pass-Through to Unemployment in Brazil

Ojonugwa Usman,Osama Elsalih

doi:10.3390/economies6030049

Abstract

This paper attempts to test the pass-through of the real exchange rate (RERT) to unemployment in Brazil over the period 1981M1–2015M11 using linear and nonlinear Autoregressive Distributed Lag (ARDL) models. The result of the linearity test suggests that the relationship between RERT and unemployment is linear in the short-run and nonlinear in the long-run. Therefore, using the symmetric ARDL model for the short-run analysis, we find that an increase in the RERT decreases the unemployment rate. The result of the nonlinear ARDL for the long-run analysis shows that the unemployment rate reacts to the RERT appreciations and depreciations differently with depreciations having a strong effect. However, the pass-through of the RERT to unemployment is incomplete both in the short- and long-run. These findings have important policy implications for the designing of appropriate monetary policy in response to a rise in unemployment resulting from a change in the real exchange rate.

Highlights

In the early 1990s, the economy of Brazil witnessed a radical shift in the exchange rate and trade policy directions toward economic liberalization, which led to high inflows of capital into the country
An attempt is made to explore the pass-through of the real exchange rate (RERT) to unemployment in Brazil using a simple approach of combining the symmetric and asymmetric Autoregressive Distributed Lag (ARDL) models over the period 1981M1–2015M11, as suggested by the symmetric test
Given that most studies consider the pass-through of the exchange rate to imports and domestic prices, this study contributes immensely to the bulk of literature by taking into account that positive and negative variations of the real exchange rate have symmetrical and asymmetrical effects on unemployment

Summary

Introduction

In the early 1990s, the economy of Brazil witnessed a radical shift in the exchange rate and trade policy directions toward economic liberalization, which led to high inflows of capital into the country. The existing empirical literature documents said that the policy directions have had success in stabilizing domestic prices and reviving investment and saving decisions, as well as economic growth (see Bogdanski et al 2000; Frenkel and Ros 2006; Muinhos 2004; Albuquerque and Portugal 2005; Albuquerque and Portugal 2006; Correa and Minella 2010; Fernandes and Novy 2010). Despite these improvements, the Brazilian economy has been rather dwindling and unimpressive, as the appreciation of the real exchange rate ends up hurting the country’s competitiveness, thereby increasing the unemployment rate. This situation portends worrisome implications for the loss of human capital and an increase in the risk of social exclusion (Nagore and van Soest 2016)

Objectives

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Conclusion