The relationship between interest, exchange rate and inflation in BRICS-T countries: Panel cointegration analysis

Abstract

Inflation, one of the most serious economic problems of the modern era, has risen to the top of the priority list for economic management, monetary, and fiscal policies in both developed and developing countries. While cyclical fluctuations in food and energy supply and demand create inflationary pressures, such pressures can cause major problems with interest and  exchange rates in developing countries with insufficient financial depth. There are numerous factors that contribute to high inflation, which is a significant issue for developing economies. One of the primary goals of economic management is to eliminate the direct and indirect effects of high inflation on economies. In the study, the relationship between inflation, exchange rate and interest rates has been evaluated in terms of BRICS countries (Brazil, Russia, India, China, South Africa) and Türkiye. The nature of the relationship between interest, exchange rate and inflation was attempted to be determined using panel data tests and consumer price index and interest rate data for the 1996M10-2021M12 periods. According to the research findings, as the dollar rate variable gains value against the local currencies (excluding the Russian Ruble), the countries’ consumer price levels rise. This is also true for the common Panel. When we examine the effect of the interest rate variable on the consumer price level on a country by-country basis, we see that it is negative in Brazil, China, and South Africa, but positive in Russia and Türkiye.