The asymmetric effect of exchange rate on economic growth in BRICS countries: Non-linear Panel ARDL approach

Abstract

Exchange rate fluctuations are an important factor in shaping the quality of macroeconomic stability and growth in emerging nations. Understanding the asymmetric effects of exchange rates is important to properly frame policy in BRICS settings. This study's primary goal is to investigate the asymmetric effects of exchange rates on economic growth in the BRICS countries from 1994 to 2024. The study used the Non-linear Panel ARDL (NPARDL) model and it revealed significant asymmetries: appreciation of the domestic currency (negative exchange rate shocks) is positively and significantly associated with GDP, with a coefficient of 0.158%, whereas depreciation (positive shocks) decreases GDP by 0.583% for every 1% fall in the local currency. Long-run results also indicate that inflation and trade have a positive influence on economic growth. Interest rates on the other hand, continue to wield strong short- and long-run deleterious effects on growth. Secondly, this study confirms an equilibrium long-run relationship among the variables, as evidenced by the short-run component results, which show a negative and statistically meaningful error correction term at the 5% level. The coefficient reflects a quite low adjustment rate, with the present time course redressing about 19.4% of the disequilibrium caused by the shock of the previous phase. This study recommends that BRICS policymakers pursue exchange rate stability, enhance trade, and adopt balanced monetary policies that avoid prolonged periods of high interest rates.  In order to increase shock adaptation and ensure sustained growth, structural reforms and institutional reforms are also necessary.