The Impact of Oil Shock on Exchange Rates in BRICS Countries: A Markov Switching Model

Abstract

As we expect the heterogeneous effect of oil shocks on the exchange rate, in this paper, we consider using the Markov switching approach to quantify this shock’s effect in a different state of the economy, namely economic downturn, and upturn. We first quantify the structural oil shocks and find the causal effect of these shock indicators on BRICS currencies. Our empirical results demonstrate the presence of a non-linear structure of BRICS exchange rates, with the different effects of oil shocks on real exchange rates. Besides, there exists a strong effect of the oil shocks on real exchange rates in three countries, namely India, Russia, and South Africa.