Probing the exchange rate’s asymmetric reaction to oil price changes in the new BRICS Plus group

Abstract

We aim to show how any variants of a unified currency among BRICS Plus countries are challengeable, by probing the disparate influence of the positive and negative alterations in the crude oil’s international price on the real effective exchange rates. The paper applies the nonlinear autoregressive distributed lag approach to separate oil price upswings from downswings and assesses how such changes asymmetrically affect the real effective exchange rates of BRICS Plus members in the short and long runs using monthly time series variables from January 2000 until July 2023. Our findings reveal that in the short run, the asymmetric impacts of the positive and negative oil price changes on the real effective exchange rates appear in all BRICS Plus countries. In the long run, Brazil and Argentina confirmed the asymmetric impact of oil price changes on their real effective exchange rates, while the symmetric impact is confirmed in Russia, the United Arab Emirates, and Ethiopia. Our findings prove that a unified currency or a unified monetary union is a very challenging idea, as continuous appreciations or depreciations of the local currencies of BRICS Plus countries will have to be implemented to preserve their alignment with the composite currency unit. Moreover, the asymmetric responses will induce diverse policy recommendations concerning the oil pricing. Our study comes to fill a vital lacuna in the literature as it is the first study to probe the asymmetric association between the oil’s international price and the real effective exchange rate in the BRICS Plus countries.