Macroeconomic costs of currency crises in BRICS: an empirical analysis

ABSTRACT

The present study examines the behaviour of macroeconomic indicators during the currency crises in BRICS from 1996:Q1 through 2015:Q4. We identify 22 crisis episodes based on EMP index. Our primary results suggest that output, foreign reserves, broad money growth and REER see a steep decline due to crisis episodes. Whereas inflation, current account deficit, unemployment and real interest rate experience a sharp rise due to crises. The results from Panel VAR show that output declines due to currency crises apart from supporting the primary results. The results from the Fixed Effects methods also show that currency crises negatively affect output.

KEYWORDS:

• Currency Crises
• BRICS
• Output Growth
• V-Shaped Recovery
• Panel VAR

JEL CLASSIFICATION:

• E32
• F31
• F37
• G01

Acknowledgements

We thank the anonymous referees and the Editor (Prof.) Ashima Goyal for their constructive and insightful comments in improving the quality of the paper. The usual disclaimer applies.

Disclosure Statement

No potential conflict of interest was reported by the authors.

Notes

1. To identify the currency crisis based on this definition we employ Exchange Market Pressure Index (more on this in methodology section) (See, Kaminsky, Lizondo, and Reinhart 1998; Peng and Bajona 2008).

2. The acronym BRICS coined by Jim O’ Neill stands for Brazil, Russia, India, China and South Africa (Syriopoulos, Makram, and Boubaker 2015).

3. We check for the validity of One-Way Fixed Effects using Hausman specification test before moving on to Two-Way Fixed Effects, and we check whether Two-Way Fixed Effects is a feasible method.

4. China was one of the few East Asian economies which neither experienced the currency crisis nor the contagion effects of Asian Crisis of 1997 (see, Peng and Bajona 2008).

Additional information

Notes on contributors

Balaga Mohana Rao

Balaga Mohana Rao was a Ph.D. Candidate in Economics at the Department of Humanities and Social Sciences, IIT Bombay at the time of writing this research paper. Currently, he is an Assistant Professor of Economics at Christ (Deemed to be University), Bangalore, India. His primary research area is Open-Economy Macroeconomics.

Puja Padhi

Puja Padhi is an Associate Professor of Economics at the Department of Humanities and Social Sciences, IIT Bombay. Her research areas include Financial Economics, Monetary Economics and International Economics. She has published numerous research papers in peer-reviewed journals.