The Exchange Rate and Interest Rate Nexus: Evidence From the Symmetric Panel ARDL Approach

Abstract

The exchange rate and interest rate nexus is a crucial area of research as it has significant implications for monetary policy, international trade and financial stability. This article investigates the dynamic relationship between exchange rates and interest rates in the context of the Brazil, Russia, India, China and South Africa (BRICS) countries. Employing a dataset spanning the period from February 1999 to August 2021, we employ a panel data approach to analyse the relationship between exchange rates and interest rates across the BRICS nations. The study incorporates key macroeconomic indicators such as inflation rates, GDP growth, treasury bill rate, money supply growth, call money rate to capture the complicated nature of the exchange rate and interest rate dynamics. Our empirical analysis employs various econometric techniques, including panel unit root tests, panel cointegration analysis and panel autoregression distribution models. These methodologies enable us to assess both the short-run and long-run dynamics between exchange rates and interest rates while accounting for potential heterogeneity across the BRICS countries. The findings reveal substantial heterogeneity in the exchange rate and interest rate nexus among the BRICS nations.