Modeling exchange rate-interest rate differential nexus in BRICS: The role asymmetry and structural breaks

Abstract

This paper produces three new results for the interest rate differential – exchange rate nexus using data for the BRICS countries. One, it mostly validates the sticky price thesis which specifies negative relationship between interest rate differential and exchange rate in the countries. Two, further probe reveals that exchange rate predominantly responds asymmetrically to interest rate differential in four of the five countries. Three, the study reveals noteworthy result for China, showing that the nonlinearity in the nexus could be better captured with a threshold, rather than an asymmetric model.