Exchange rate and oil price pass-through in the BRICS countries: Evidence from the spillover index and rolling-sample analysis

Abstract

This paper offers new evidence on the exchange rate and oil price pass-through in the BRICS countries through the analysis of the Diebold-Yilmaz spillover index and rolling-windows. Using the monthly frequency data from 1999:M01-2019:M11, our study provides the following findings: (i) there is strong evidence of directional spillovers across the countries; (ii) the total spillovers are low, with Russia (China) having the highest (lowest). This suggests a low pass-through across the countries; (iii) the net spillovers of oil price and exchange rate are positive in Brazil, Russia, and South Africa, while in India, they are both negative. Our results further suggest that the net spillovers of inflation and output growth are positive in India, while in China, the net spillover of inflation is negative with oil price and output growth having positive net spillovers. The positive (negative) net spillover indicates that a variable contributes to the forecast error variance decomposition of other variables more(less) than what it receives from other variables; (iv) the historical events and crises interrupt the extent of spillovers across the countries, and; (v) the spillovers exhibit significant bursts with no clear-cut evidence of trends across these countries. These findings are useful in formulating an optimal monetary policy. (c) 2021 Elsevier Ltd. All rights reserved.