Exchange Rate Dynamics and Trade Competitiveness in BRICS: A Panel Data Approach

Abstract

This paper aims to analyze the relationship between exchange rate dynamics, trade competitiveness, and macroeconomic variables in BRICS countries, utilizing annual data from 1996 to 2023. By applying advanced econometric techniques, including cointegration and the Vector Error Correction Model (VECM), the study examines both short-term dynamics and long-term relationships. The results show that approximately 19% of deviations from the long-run equilibrium in REER are corrected each period, indicating a moderate adjustment speed toward long-term equilibrium. In the short run, GDP significantly increases REER reducing trade competitiveness, whereas currency depreciation and increased trade openness decrease REER, enhancing competitiveness. Inflation’s impact on REER remains minimal. These findings highlight both the short term and long-term dynamics of exchange rates in BRICS economies and their implications for trade competitiveness.