Abstract:
Purpose – This paper aims to investigate the interrelations between purchasing power parity (PPP) and
uncovered interest parity (UIP) in BRICS economies, namely, Brazil, Russia, India, China and South Africa, by
checking the validity of the capital-enhanced equilibrium exchange rate (CHEER) approach. Further, this
study tests whether the CHEER results are data frequency-dependent.
Design/methodology/approach – The present study uses monthly data ranging from 1997M01 to
2016M12 and considers the US economy as the representative foreign country. The study uses structural
break unit root test and structural break cointegration technique to test the presence of economic relationships
between nominal exchange rates and each of the price and interest rate differentials. Then, the study
examines the validity of the CHEER approach by testing the appropriate theoretical restrictions.
Findings – The cointegration results suggest the existence of two cointegrating vectors representing UIP
and PPP conditions. For all countries, the data appear to support the hypothesis that the system contains UIP
and PPP relations. However, each of the international parity hypotheses is strongly rejected when formulated
in isolation and jointly, leading to repudiation of the CHEER validity. Further, it is found that the results are
data frequency-dependent and suggest that higher frequencies should be used as they provide additional
information.
Originality/value – First, the literature on equilibrium exchange rates in BRICS economies is scanty.
BRICS economies are large-emerging economies and one of the fastest growing economies and thus entail an
empirical enquiry on their exchange rates. Second, the empirical application has mainly used monthly data to
test the validity of the CHEER approach. However, data frequencies could affect the results. To the best of the
authors’ knowledge, this study is the first to check data frequency-dependency in examination of the CHEER
approach.
