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Exchange rate uncertainty and private investment in BRICS economies

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Abstract

Macroeconomic uncertainty is a major challenge facing policymakers. Exchange rate is usually associated with high level of volatility in developing economies. This has potential effect on other economic variables such as investment. This paper empirically examines the impact of exchange rate uncertainty on private investment in the BRICS bloc. Using cross-country time series data from World Development Indicators, for 1997–2015, we built an ARCH-based measure of exchange rate volatility to proxy uncertainty. The results show that uncertainty resulting from exchange rate volatility has a negative effect on private investment in both random and fixed effects as well as GMM estimations. Therefore, policy may focus on stabilizing domestic currencies in BRICS countries.

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Notes

  1. BRICS refers to emerging market economies, namely Brazil, Russia, India, China, and South Africa.

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Acknowledgments

We would like to thank the anonymous referees for their insightful comments on earlier versions of this paper. We are also grateful for the valuable suggestions from the participants at the Statistical Methods in Finance Conference (December 19–22, 2016) held at Chennai Mathematical Institute. The usual caveat applies.

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Authors and Affiliations

  1. Department of Economics, Annamalai University, Annamalai Nagar, TN, India

    Martin Ruzima & Micheal Kofi Boachie

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  1. Martin Ruzima
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  2. Micheal Kofi Boachie
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Correspondence to Martin Ruzima.

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Ruzima, M., Boachie, M.K. Exchange rate uncertainty and private investment in BRICS economies. Asia-Pac J Reg Sci 2, 65–77 (2018). https://doi.org/10.1007/s41685-017-0062-0

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