MONETARY POLICY SHOCKS AND INDUSTRIAL OUTPUT IN BRICS COUNTRIES

Abstract

This study employs a Panel Structural Vector Autoregressive model (P - SVAR) to investigate how monetary policy shocks affect industrial output in BRICS countries using monthly data for the period 1994:1 to 2013:12. A nine variable P - SVAR with short-run restrictions among the variables is constructed for the analysis. The study finds that variations in the exchange rate have the largest impact on industrial output in the BRICS countries. It is also observed that inflation rates significantly increase industrial output, peaking after about eleven months. This reveals that monetary authorities should be cautious when formulating policies aimed at reducing the rate of inflation because of the spillover effect on industrial output. Further analysis reveals that interest rates have a marginal effect on exchange rates, while money supply makes a relatively large contribution to exchange rate fluctuations. Again, it is observed that changes in money supply exert a very large impact on variations in the rate of inflation. Thus, money supply plays an important role in curbing inflation. The study also analyses variations in interest rates, money supply and inflation and concludes that monetary authorities in the BRICS countries adjust interest rates, and not money supply, in response to inflation expectations.

JEL Code: E5, E52, E58, L6