affect international flows of merchandise.

Of course a weak Real will enhance

Brazilian exports and discourage imports. Higher than usual volatility is expected to

have a negative impact on exports. Two cases of exchange rate volatility are

examined. One is the volatility from national currency per USD called “own”. The

other type is the volatility from EUR/USD and JPY/USD called “third country”

volatility or G-3 volatility. Stable bilateral exchange rates (ExRUSDt) are expected to

have a positive impact on the international flows of goods and services as it assures

traders a more steady certain revenue than when there are periods of instability in

exchange rates. And in the case of G-3 currency volatility depends on the

comparative advantage of each country.

Enders (2004) recommends the use of a vector autoregressive (VAR (k))

model treating each variable symmetrically when one is not certain whether the

exogenous condition holds. In our specific case, a VAR(k) model allows the time

paths of 𝐸𝑥𝑝𝑜𝑟𝑡𝑠𝑡 to be affected by current and past realizations of WGDPt-p and

ExRUSD𝑡 sequence; the time paths of WGDPt-p be affected by current and past

realizations of 𝐸𝑥𝑝𝑜𝑟𝑡𝑠𝑡 and ExRUSD𝑡 sequence; and in the same fashion for

ExRUSD𝑡 and the rest of the equations that could be added within the multivariate

systems below. In the case of own country volatility:

𝐸𝑥𝑝𝑜𝑟𝑡𝑠𝑡 𝛼10 𝛼11 (1) 𝛼12 (1) 𝛼13 (1) 𝛼14 (1) 𝐸𝑥𝑝𝑜𝑟𝑡𝑠𝑡−1
WGDP𝑡 𝛼20 𝛼21 (1) 𝛼22 (1) 𝛼23 (1) 𝛼24 (1) WGDP𝑡−1
ExRUSD𝑡 = [𝛼30 ] + 𝛼 (1) 𝛼32 (1) 𝛼33 (1) 𝛼34 (1)
∗ ExRUSD𝑡−1 +
31
𝑉𝑂𝐿𝐎𝐖𝐍 𝛼40 𝑉𝑂𝐿𝐎𝐖𝐍
𝐔𝐒𝐃 𝑡 [𝛼41 (1) 𝛼42 (1) 𝛼43 (1) 𝛼44 (1)] [ 𝐔𝐒𝐃 𝑡−1 ]
(3.25)
𝛼11 (𝑘) 𝛼12 (𝑘) 𝛼13 (𝑘) 𝛼14 (𝑘) 𝐸𝑥𝑝𝑜𝑟𝑡𝑠𝑡−𝑘 ε1𝑡
𝛼21 (𝑘) 𝛼22 (𝑘) 𝛼23 (𝑘) 𝛼24 (𝑘) WGDP𝑡−𝑘 ε2𝑡
∗ ExRUSD𝑡−𝑘 + [ε ]
𝛼31 (𝑘) 𝛼32 (𝑘) 𝛼33 (𝑘) 𝛼34 (𝑘) 3𝑡
𝑉𝑂𝐿𝐎𝐖𝐍 ε4𝑡
[𝛼41 (𝑘) 𝛼42 (𝑘) 𝛼43 (𝑘) 𝛼44 (𝑘)] [ 𝐔𝐒𝐃 ]
𝑡−𝑘

33