Monetary policy rules in the BRICS : how important is nonlinearity?

Abstract

Given limited research on monetary policy rules in emerging markets, this paper estimates monetary policy rules for five key emerging market economies: Brazil, Russia, India, China and South Africa (BRICS) analysing whether the monetary authority reacts to changes in financial markets, in monetary conditions, in the foreign exchange sector and in the commodity price. To get a deeper understanding of the central bank’s behaviour, we assess the importance of nonlinearity using a smooth transition (STAR) model. Using quarterly data, we find strong evidence that the monetary policy followed by the Central Banks in the BRICS varies from one country to another and that it exhibits nonlinearity. In particular, considerations about economic growth (in the cases of Brazil and Russia), inflation (for India and China) and stability of financial markets (in South Africa) seem to be the major drivers of such nonlinear monetary policy behaviour. Moreover, the findings suggest that the monetary authorities pursue, with the exception of India, a target range for the threshold variable rather than a specific point target. In fact, the exponential smooth transition regression (ESTR) model seems to be the best description of the monetary policy rule in these countries.