Real interest rates, exchange rates and growth in three emerging economies: an exploratory analysis of Brazil, India and Nigeria

This paper studies the dynamic relationships between real growth, the real lending interest rate and the exchange rate in Brazil, India and Nigeria over 2000-2022. The theoretical framework places these relationships within the literature on the procyclicality of macroeconomic policies, "fear of floating" and the global financial cycle, without treating the observed variables as monetary policy instruments directly controlled by central banks. Activity is measured by real GDP in constant local currency (World Bank, NY.GDP.MKTP.KN). Real growth is defined as 100 × Δlog(real GDP) and the change in the exchange rate as 100 × Δlog(exchange rate), with the exchange rate quoted in units of local currency per dollar. The interest rate variable is the World Bank real interest rate (FR.INR.RINR), that is, a lending rate adjusted for inflation as measured by the GDP deflator; it is not a policy rate. Parsimonious bivariate VARs are estimated after examining stationarity, with lag selection by BIC and orthogonalised impulse responses. In the baseline specification, Brazil shows two pointwise exclusions of zero following a real interest rate innovation: a contraction at one year and a rebound at three years. These two features are not, however, robust to the same specification choices: the rebound disappears in a VAR(1), while the contraction is no longer distinguishable from zero when the sample ends in 2019. The estimated responses for India and Nigeria remain imprecise, as do the growth responses to exchange rate innovations. Given the very small sample, the large number of horizons examined, the absence of global financial variables and the non-structural nature of the innovations, the results are interpreted as descriptive and exploratory rather than as causal effects of monetary policy.