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Aalto University School of Business Master's Theses are now in the Aaltodoc publication archive (Aalto University institutional repository)
School of Business | Department of Economics | Economics | 2016
Thesis number: 14767
Are foreign exchange rate shocks affecting the trade balance? An empirical analysis of Brazil, the Eurozone, Japan and United States between 2000 and 2012
Author: Leskinen, Eero
Title: Are foreign exchange rate shocks affecting the trade balance? An empirical analysis of Brazil, the Eurozone, Japan and United States between 2000 and 2012
Year: 2016  Language: eng
Department: Department of Economics
Academic subject: Economics
Index terms: kansantaloustiede; valuuttakurssit; devalvaatio; Brasilia; euro; Japani; Yhdysvallat
Pages: 92
Key terms: exchange rate, IS-LM, J-curve, VAR
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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