Impact of exchange rate regimes on inflation: An empirical analysis of BRICS countries

Emerging market economies (EMEs) are increasingly important drivers of global economic growth, as witnessed by the substantial increases in their share of world output during the last four decades. The choice of an exchange rate regime is a recurring issue in international macroeconomics. Recently, the currency crisis in Asia, Russia, Brazil and Argentina has increased interest in this area and the effects of exchange rate regimes become even more important in developing countries. Hence, the purpose of this study is to revisit the effects of exchange rate regimes on inflation in BRICS countries. The data used for this research covers over the period from 1970 to 2012. This study finds that BRICS countries under the Pegged exchange rate regime have lower inflation rate compare to those under the non-Pegged exchange rate regime. The analysis in this study proposes that exchange rate regimes choice and money supply influence the inflation dynamics in the BRICS countries. In addition, the empirical results attained from the analysis of inflation show that the real depreciation resulting from a nominal depreciation will be unwound in a short-time which will reduce the advantages of a flexible exchange rate regime. The analysis in this study also shows that there is a positive relationship between monetary expansion and inflation in the BRICS countries.