Competitive devaluations and the trade balance in less developed countries: An empirical study of Latin American countries

Policymakers in less developed countries (LDCs) usually support competitive devaluations to improve the trade balance (TB). In this paper, we estimate the effects of appreciated and depreciated real exchange rates (RER) in the TB of Argentina and Brazil during the period, 1990-2010 using co-integration tests for non-stationary data and vector error correction models (VECM). The estimations confirmed the existence of a long-term relationship among the TB and the RER and foreign and domestic incomes for the countries during opposite RER policies. Based on our estimations, the Marshall-Lerner condition held during periods of more flexible and depreciated RER, and the estimation of the general impulse response functions demonstrated that devaluations in both countries did not follow a J-curve pattern in the short-term.