Shocks Identification in Argentina and Brasil. A Vector Error Correction Model

CARRERA, JORGE; FÉLIZ, MARIANO; PANIGO, DEMIAN TUPAC

Lima

Congreso; XV Latin American Meeting of The Econometric Society; 1998

Econometric Society

Since the year 1986 Argentina and Brazil have been integrating their economies. Therefore, it is relevant to examine the nature of the shocks that affect them. Even with appropriate consistent policies, fixing the exchange rate may not be optimal if the shocks are different. We discuss the relationship between economic integration and greater interdependence, presenting the implementation of the cost-benefit analysis to determine the optimality of a monetary area. We highlight the crucial role that the symmetry of shocks plays in the determination of the costs of integration. Then, we move on to the dynamic analysis of the empirical evidence with the construction of a VEC (Vector Error Correcting) model. First, we choose a model that allows us to test the characteristics of the shocks, selecting two common external variables (international interest rate and export prices) and two endogenous variables (domestic supply represented by the GDP and domestic demand represented by inflation). Next, we study the order of integration, applying several tests to establish the number of lags appropriate, and in the last step we estimate the co-integration vectors through Johansen’s procedure. Finally, we analyze the impulse-response functions and the variance decomposition of the shocks. Among some of the conclusions we find a more coincident behaviour of the economies after an external shock than after an internal one. The role of interest rate is more important than export prices. The variance explanation of a shock is slightly different for each country