Exchange rate regimes and its impact on growth: An empirical analysis of BRICS countries

Emerging market economies (EMEs) are increasingly important drivers of global economic growth, as witnessed by the substantial increases in their share of world output during the last four decades. The choice of an exchange rate regime is a recurring issue in international macroeconomics. Recently, the currency crisis in Asia, Russia, Brazil and Argentina has increased interest in this area and the effects of exchange rate regimes become even more important in developing countries. Hence, the purpose of this study is to revisit the effects of exchange rate regimes on Growth of BRICS countries. The data used for this research covers over the period from 1970 to 2012. This study finds that the Pegged exchange rate regimes are not much associated with better performance in terms of growth. In the growth performance, BRICS countries with Pegged regimes show significantly negative growth. Pegged regimes have significantly (-81%) lower growth in BRICS countries. The impact of Pegged regime on growth increases and the positive link between Pegged regimes and GDP growth can occur through a pegged regime’s price stability effect. Countries with Pegged regimes have lower real interest rates since pegged regimes act as an antiinflationary tool for monetary policy makers. Thus, low real interest rates lead to an increase in investment, and in the end, a high level of investment leads to higher levels of economic growth. Moreover, by adopting a pegged regime can promote trade for BRICS countries and lead to an increase in economic growth.