This Paper investigates the responsiveness of the BRIC countries (Brazil, Russia, India and China)
monetary policy settings to different financial stress conditions over the last two decades. The
International Monetary Fund’s emerging country financial stress index along with its sub
components; Banking Stress, Security market Stress and Exchange Rate Stress is used to
measure the financial stress in BRIC countries. A time varying coefficient model for a forward
looking monetary policy rule is used to estimate the results. The estimation was preceded via a
varying coefficient (VC) estimation technique and the results were confirmed by a Heckman
Type (1976) two step maximum likelihood procedure. The initial results suggested the money
supply over the official interest rate as the most effective monetary policy tool for BRICs. The
main results found that the BRIC country central banks loosen the monetary policy during
higher financial stress periods and heavily responded to the exchange rate stress over the other
two sub components.
Keywords : Financial Stress, Taylor Rule, McCallum Rule, Monetary Policy, BRIC Countries, Time
Varying Parameter Model, Endogeneity
JEL Classification: E42, E52, E58,