Transmission Mechanism of Monetary Policy in BRICS Countries: A Comparative Response with the USA

Abstract

The main objective of this study is to analyze the monetary transmission mechanism in key emerging market economies: Brazil, Russia, India, China, and South Africa (BRICS). For this purpose, we have estimated benchmark VAR models with money aggregation. The time series quarterly data from 2009Q1 to 2019Q4 used for the variables include real GDP, consumer price index, short-term interest rate, money supply aggregation M2, and the real effective exchange rate. We also examined the dynamic responses of various macroeconomic variables to the policy shocks. The findings of this study can be summarized as follows: As a result of a temporary rise in the short-term interest rate, the response of output is diversified across countries. Overall, the interest rate increase hurts output. In Brazil, Russia, and India we observed a temporary fall in output that converges to baseline afterward, while it continues to show negative divergence in the case of China and South Africa. The real appreciation of the exchange rate in BRICS countries is found. Prices respond sluggishly to the monetary policy shock in countries of the BRICS association and only start to fall significantly several quarters after GDP. The comparative analysis shows that the effect of the monetary policy shock on the output in the USA is much slower as compared to the economies of BRICS. The impact on prices is also found to be slower in the US as compared to the BRICS countries. In other words, prices are found to be more sluggish in the US.