Impact of U.S. financial crisis on BRICS: an empirical investigation of macroeconomic and financial indicators

Abstract

The paper seeks to measure US financial crisis of 2008 and its impact on BRICS economies. The paper contributes to the literature on inter-temporal and inter-country dynamics of US financial crisis of 2008. It combines continuous and discrete approaches for defining and measuring crisis. It uses India as a control which enables inter-country comparison. This is undertaken by segregating the variables into causal and impacted via Granger causality test. Impacted variables were segregated into two sets namely macro and financial variables. The PCA was applied to produce three indices namely, Composite Crises Index (CCI), Composite Macroeconomic Index (CMI) and Composite Financial Index (CFI). The annual data for the period of 1999-2013 were taken from World Bank, Bloomberg, IMF and OECD. It was found that CCI consists of quasi-money, domestic credit to private sector and gross capital formation. The CMI comprises of industry value added, consumer price inflation and real effective exchange rate whereas CFI consist of FDI inflows, market capitalisation and lending interest rate. The FGLS(1967) which takes into consideration the heteroscedasticity and serial correlation in the residuals found that all the countries were impacted by the crisis. The analysis found CFI to be significant determinant of CCI.