Real exchange rate, financial support and exports in Brazil: estimation of the sector export equation with implicit exchange rates

ABSTRACT This paper assesses the relevance of export incentives in Brazil from 2004 and 2011. Departing from the hypothesis that exports profitability and incentives depend not only on the level of the real exchange rate and world income, but also on potential financial income obtained from such export incentives, the study calculates implicit exchange rates by sectors. The objective is to test the hypothesis that, together with the traditional variables of an export function, it is the adjusted implicit exchange rate, not the real exchange rate, the relevant variable to explain the level of sectoral exports in Brazil. Hence, two export equations are estimated using panel data, each one contemplating one of the available exchange rates. The results show that the implicit exchange rate is indeed relevant to explain exports and stress the importance of exports incentives.