Present value tests of the Brazilian current account

Resumo

During the 90s, and in particular after the adoption of the Real Plan in 1994, a clear deterioration in the Brazilian current account has been observed. This fact attracted immediate attention to the question of whether or not the economy is obeying its external present value constraint, i.e., whether the current account deficit is on a sustainable path.The purpose of this paper is to investigate the "long run tendency" of the Brazilian current account. The procedure used is to estimate cointegrating regressions between exports and imports plus interest rate payments. Initial evidence from the regressions suggests that from 1947 to 1997 the long-run Brazilian current account was not zero. As we use a long span of data we also examine if there are any structural breaks in the cointegrating vectors in the face of regime changes. Since 1982 there has been an apparent structural shift in the relationship between trade flows. With the break, however, the results do not change. Conditions for intertemporal budget balance are still not satisfied.