Monetary policy co-movement and spillover of shocks among BRICS economies

ABSTRACT

The 2008 global financial crisis has revealed the possibility of cross-border spillover effects of domestic Monetary Policy (MP) on financial stability and capital flows around the world. Recognizing these facts, Central Banks in Advanced Economies (AE) have undertaken simultaneous Monetary Policy actions to minimize collateral damage and contain financial risks. In this paper, we investigate whether a similar spillover and co-movement of Monetary Policy exist among BRICS countries. Specifically, we study the transmission of monetary policy shocks among the member countries using monthly data. We use the method of Principal Component Analysis (PCA) and Vector Autoregression Model to identify possible dynamic relationships. Our results indicate possible co-movement in interest rates and significant cross-border transmission of monetary policy shocks among the BRICS countries.

KEYWORDS:

• Monetary policy
• BRICS
• principal components
• VAR
• panel VAR

JEL CLASSIFICATION:

• E43
• E58
• F42

Acknowledgments

The authors are very grateful for the suggestions received from the participants of the 2nd Annual Meeting of the Society for Economic Measurement in Paris, France, the 85th annual meeting of the Southern Economic Association in New Orleans, LA, and the 2016 Midwest Economics Association Annual Meeting in Evanston, IL. The authors would also like to thank Patrik Hultberg and anonymous referees for the valuable comments.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ According to the World Bank, the four largest EEs – Brazil, China, India and Russia – accounted for only 18% of World Gross National Income (GNI) in 2000. This share increased to 30% by 2013.

² These countries by the year 2015, accounted for 40% of the world’s total population. Originally, the group was founded by Brazil, Russia, India and China in 2008 to be joined by South Africa later in 2010. According to Jim O’Neill, Goldman Sachs Economist, the combined economies for these countries could surpass the economies of G7 countries by 2050.

³ Reasons for this interesting development include increased intragroup trade and financial linkages after the 1980’s between EEs, which led to greater interdependence.

⁴ Several papers have used PCA to measure international business cycles (Burns and Mitchell 1946; Stock and Watson 2005), systematic risks (Kritzman et al. 2011), finance-growth nexus (Jalil, Feridun, and Ying 2010), and forecasting (De Mol, Giannone, and Reichlin 2008), among other applications.

⁵ The results of the cointegration and error correction models show some evidence of policy co-movement.

⁶ For the impulse response analysis in section 3, the foreign monetary variable is listed first to imply that it does not respond contemporaneously to other variables.