This study attempts to establish the possible existence of the long-run interrelationship between interest rates, inflation, and exchange rates in five fragile emerging market economies (Brazil, India, Indonesia, South Africa, and Turkey), what is so-called by Morgan Stanley 'Fragile Five'. To do so, we utilize Li and Lee's (2010) Autoregressive Distributed Lag (ADL) test for threshold cointegration and apply it to sample countries' monthly time-series data from 2013:1 to 2018:12. Overall, our primary results are threefold: First, there seems to be a long-run positive relationship between actual rates of inflation rates and nominal interest rates supporting the validity of the ex-post Fisher hypothesis for all the sample countries. Second, the sample countries' data supports the presence of a cointegrating relationship between interest rates and exchange rates for the case of Brazil, India, and Turkey but not for the case of Indonesia and South Africa. Lastly, without exception, exchange rates and actual rates of inflation in all the sample countries examined tend to co-move in the long-run, implying that the depreciation of their currencies creates inflation through raising the prices of imported goods. The results above are widely compatible with both theoretical expectations and the results of the most previous empirical studies on the long-run interrelationships between interest rates, inflation, and exchange rates in the literature.In this study, we employ Li and Lee's (2010) Autoregressive Distributed Lag (ADL) test for threshold cointegration as the method of estimation. This estimation method has several superiorities compared to its rivals. First, the ADL test does not require the classification of variables into I(1) or I(0). Other cointegration procedures, such as those proposed by Engle and Granger (1987) and Johansen (1988), require checking the order of the integration of variables by using unit root tests and all variables in the model must be integrated of the same order. Second, the ADL test provides better performance in small sample sizes. Lastly, it allows for estimating the long-and the short-run parameters of the model simultaneously. Since the ADL test can overcome these three critical problems, our empirical results contribute to the understanding of the research questions that we seek to find answer in this study.The remainder of the study is organized as follows: The following two sections provide a comprehensive background to the study, focusing on not only the theoretical aspects of the possible relationships between interest rates, inflation, and exchange rates but also their empirical aspects respectively. The proceeding section lays out the econometric analysis of the study. As for Section 4, it first reports the estimation results, and then justifies them. Section 5, the final section, summarizes and concludes.
To alleviate the negative impacts of fluctuations, fiscal authorities frequently resort to counter-cyclical policies while some of them do not follow a pro-cyclical stance for fiscal discipline. Based upon this nexus, this study investigates how selected Middle East, and North African (MENA) countries respond to the movements in the economic growth through fiscal policies in the period between 1981-2017. The Vector Autoregression (VAR) methodology is employed to analyze the cyclicality of fiscal policies. The results demonstrate that Algeria, Bahrain, Egypt, Jordan, Saudi Arabia, and Tunisia tend to follow counter-cyclical policies in terms of government final consumption expenditure. However, the impulse responses of government consumption are not significant for Algeria, Egypt, and Jordan. It is concluded that countries with stronger and stable government structures tend to give quick responses to economic fluctuations.