Exchange rate misalignments and current accounts in BRICS countries

This paper assesses the impact of misalignment on the current accounts of BRICS countries using the empirical approaches that address the issue of model uncertainty and asymmetry. The results of the empirical analysis empirical confirm that the relationship between misalignment and current account is asymmetric in that overvaluation of BRICS currencies deteriorate the current account and undervaluation does improve it. Moreover, the results of the empirical analysis advocate the use of real effective exchange rate as an effective macroeconomic policy instrument to enhance relative export competitiveness in BRICS. Further studies in this area should examine the impact of marginal propensity to import and how each country’s propensity to import affects the current balance given episodes of overvaluation and undervaluation.