Intra-BRICS Trade and Exchange Rate Volatility: An Application of Gravity and GARCH Models

The study explored the fundamentals of intra-BRICS trade and examined the linkage between conditional exchange rate volatility and exports. Using the gravity model approach, the study found that market size, trade freedom, economic size, and investment freedom of the BRICS economies are crucial in augmenting intra-BRICS trade. However, the transportation costs were adversely affecting the intra-BRICS trade. The overall results indicated a dissimilar intratrade integration pattern among BRICS nations. Based on the gravity model estimates, one can argue that special attention should be placed on improving the level of development, international competitiveness, investment environment, and expanding the market base of the sample economies. In a nutshell, plans or policies related to intra-BRICS trade must be linked to the overall mechanism of development and trade. Further, the conditional exchange rate volatility was negative and significant in explaining the BRICS exports. However, the GDP and trade openness were positive and significant. Hence, the policymakers in BRICS economies should devise macroeconomic policies that are able to mitigate exchange rate volatility without compromising the level and pattern of trade openness. The BRICS economies should strengthen and restructure their domestic foreign exchange markets in general and forward exchange markets, particularly, for the absence of the latter acts as a stumbling block in mitigating the exchange rate risk.