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Theoretical and Applied Economics
No. 2 / 2021 (627), Summer

What explains the real exchange rate movement for the BRICS nations? With a separate analysis for Indian economy

Hariom ARORA
Alumni, Indian Institute of Foreign trade, New Delhi, India

Abstract. Among all the important targets that a country wants to realize from an economic perspective, i.e. reducing current account deficit, reduction in the inflation soaring, struggle with unemployment, reduction in the debt burden of the public/fiscal deficit. The main target which underlying all these desires is economic stability. For economic stability, the exchange rate plays an important role, due to little fluctuation in exchange rates, exports, imports, domestic interest rates, debts and employment level gets affected. The primary objective of this study is to empirically examine the long-run relationship between the relative productivity differential (Tradable and Non-tradable goods sector) and Real exchange rate movements with the help of the Balassa-Samuelson (BS) effect. This study uses industry-wise disaggregation provided by KLEMS database to investigate whether the more segregations of industries into non-tradable and tradable goods sector matters for real exchange rate movements across countries. This study uses two groups, BRICS countries and the Indian economy for the period of 1991-2018 and 1981-2018 respectively. With the help of panel cointegration tests proposed by Pedroni and Kao, this paper examined the long run association between the real exchange rate and productivity differential. Contrary to the findings of available in the literature, the study does not find any evidence of BS effect for BRICS nations, but finds the evidence of BS effect for India.

Keywords: Real Exchange Rate, Balassa-Samuelson hypothesis, BRICS, Panel unit-root, Stationarity test, Structural unit root tests, Cointegration tests and Time series analysis.

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