Sources of Real Exchange Rate Fluctuations: The Case of the BRICS

Abstract

This paper analyzes the importance of real and nominal disturbances on Brazil, Russia, India, China, and South Africa. The trivariate structural VAR framework of Clarida and Gali is used to examine the behaviors of relative output, real exchange rate, and relative price level for the BRICS countries. The results of the impulse response functions and variance decompositions show that real aggregate supply and demand shocks explain more of the variance of the real exchange rate fluctuation for these five countries. Taking into account the possibility of a structural break, the time period studied for each country was also divided into two parts (before and after the Great Recession) to analyze separately, which yielded results consistent with previous findings indicating the larger influence of real shocks.