Can BRICS Form a Currency Union? An Analysis under Markov Regime-Switching Framework

Abstract

The article applies Markov Regime-Switching Model (MRSM) to explore the prospects of forming currency union among BRICS countries. Our data span the period before and after the formation of the group, and the study compares the regime-switching behaviour of their real exchange rate markets accordingly. The analysis found divergent real exchange market behaviour of the member countries before the formation of the group. However, after the integration of economies, the convergences in central bank’s direct intervention behaviours are evident especially among India, China and South Africa. The study concludes that the inclusion of the stronger policy interaction in the region now and future, especially in monetary management, unveils the chance of a strong currency union among BRICS members.