Abstract
In this paper, we identify the fundamental determinants of the long-run exchange rate in South Africa. We then estimate the equilibrium real exchange rate for this country using a dataset covering the period 1975–2012. In order to account for possible short-run fluctuations in the real exchange rate, we conducted a cointegration test using the ARDL bounds testing procedure. First, we found terms of trade, trade openness, government consumption, net foreign assets and real commodity prices to be the long-run determinants of the real exchange rate in South Africa. Second, we found that nearly 68.06% of the real exchange-rate disequilibrium is corrected annually. Overall, the estimated equilibrium rate indicates that the Rand has been depreciating in real terms over the years. Tightening trade openness is not an option, given international agreements; on the other hand, terms of trade and real commodity prices are determined by the world market. The obvious policy alternative is for South Africa to increase government spending and moderately decrease her net foreign asset position.
References
Aron, J., I. Elbadawi, and B. Kahn. 2000. “Real and Monetary Determinants of the Real Exchange Rate in South Africa.” In Development Issues in South Africa, edited by I. Ibrahim Elbadawi and T. Hartzenberg. Chapter 8:195–236. London: Macmillan.Search in Google Scholar
Berger, H., J.-E. Sturm, and J. de Haan. 2000. An Empirical Investigation into Exchange Rate Regime Choice and Exchange Rate Volatility (CESifo Working Paper No. 263). Munich: CESifo Institute.10.2139/ssrn.263948Search in Google Scholar
Brown, R. L., J. Durbin, and J. M. Evans. 1975. “Techniques for Testing the Consistency of Regression Relations Over Time with Discussion.” Journal of the Royal Statistical Society, Series B 37 (2):149–92.Search in Google Scholar
Caner, M., and L. Kilian. 2001. “Size Distortion of Tests of the Null Hypothesis of Stationarity: Evidence and Implication for the PPP Debate.” Journal of International Money and Finance 20:639–57.10.1016/S0261-5606(01)00011-0Search in Google Scholar
Cardenas, M. 1997. La Tasa de Cambio en Colombia. Bogota: Cuadernos Fedesarallo.Search in Google Scholar
Cashin, P., L. Cespedes, and R. Sahay. 2002. Developing Country Real Exchange Rates: How Many are Commodity Countries? (IMF Working Paper No. 02/223). Washington: International Monetary Fund.Search in Google Scholar
Chen, Y.-C., and K. Rogoff. 2002. Commodity Currencies and Empirical Exchange Rate Puzzles (IMF Working Paper No. 02/27). Washington: International Monetary Fund.10.2139/ssrn.879381Search in Google Scholar
Clark, P., L. Bartolimi, T. Bayoumi, and S. Symansky. 1994. Exchange Rates and Economic Fundamentals: A Framework for Analysis (IMF Occasional Paper No. 115). Washington: International Monetary Fund.10.5089/9781557754516.084Search in Google Scholar
Collins, S. M. 1996. “On Becoming More Flexible: Exchange Rate Regimes in Latin America and the Caribbean.” Journal of Development Economics 51 (October):117–38.10.1016/S0304-3878(96)00428-2Search in Google Scholar
De Gregorio, J., A. Giovannini, and H. Wolf. 1994. “International Evidence on Tradables and Nontradables Inflation.” European Economic Review 38 (June):1225–44.10.3386/w4438Search in Google Scholar
De Kock, G. 1985. Commission of Inquiry into the Monetary System and Monetary Policy in South Africa (Final Report). Pretoria: Government Printer.Search in Google Scholar
Driver, R., and S. Wren-Lewis. 1997. Real Exchange Rates in the Year 200. Washington: Institute for International Economics.Search in Google Scholar
Edwards, S. 1994. “Real Monetary Determinants of Real Exchange Rate Behavior: Theory and Evidence From Developing Countries.” In Estimating Equilibrium Exchange Rates, edited by J. Williamson. Washington: Institute for International Economics.Search in Google Scholar
Edwards, S. 1996. The Determinants of the Choice Between Fixed and Flexible Exchange Rate Regimes (NBER Working Paper No. 5756). Cambridge, MA: National Bureau of Economic Research.10.3386/w5756Search in Google Scholar
Elbadawi, I., and R. Soto. 1994. Capital Flows and Long-Term Equilibrium Real Exchange Rates: Chile (Unpublished). Washington: World Bank.Search in Google Scholar
Elliot, G., T. J. Rothenberg, and H. Stock. 1996. “Efficient Tests for an Autoregressive Unit Root.” Econometrica 64:813–36.10.3386/t0130Search in Google Scholar
Frankel, J. 1995. “Monetary Regime Choice for a Semi-Open Country.” In Capital Controls, Exchange Rates and Monetary Policy in the World Economy, edited by S. Edwards. Cambridge: Cambridge University Press.10.1017/CBO9780511571886.003Search in Google Scholar
GEM Commodities. 2014. http://data.worldbank.org/data-catalog/commodity-price-data [Accessed 3 September 2014].Search in Google Scholar
Ghei, N., and L. Pritchett. 1999. “The Three Pessimisms: Real Exchange Rates and Trade Flows in Developing Countries.” In Exchange Rate Misalignment: Concepts and Measurement for Developing Countries, edited by L. Hinkle and P. Montiel. New York: Oxford University Press for the World Bank.Search in Google Scholar
Goldfajn, I., and R. Valdes. 1999. “The Aftermath of Appreciations.” Quarterly Journal of Economics 114 (February):229–62.10.3386/w5650Search in Google Scholar
Hausmann, R., U. Panizza, and E. Stein. 2001. “Why Do Countries Float the Way They Float?” Journal of Development Economics 66 (December):387–414.10.1016/S0304-3878(01)00168-7Search in Google Scholar
Hinkle, L., and P. J. Montiel. 1999. Estimating Equilibrium Real Exchange Rates in Developing Countries. New York: Oxford University Press for the World Bank.Search in Google Scholar
Hodrick, R., and E. C. Prescott. 1997. “Postwar U.S. Business Cycles: An Empirical Investigation.” Journal of Money, Credit, and Banking 29 (1):1–16.10.4324/9780203070710.pt8Search in Google Scholar
Imam, P., and C. Minoiu. 2011. “The Equilibrium Exchange Rate of Mauritius: Evidence From Two Structural Models.” Emerging Markets Finance & Trade 47 (6):134–47.10.2753/REE1540-496X470608Search in Google Scholar
Lane, P. R., and G. M. Milesi-Ferretti. 2000. Long-Term Capital Movements (NBER Working Paper No. 8366). Cambridge, MA: National Bureau of Economic Research.10.3386/w8366Search in Google Scholar
Lee, J., G. M. Milesi-Ferretti, J. Ostry, A. Prati, and L. A. Ricci. 2008. Exchange Rate Assessments: CGER Methodologies (IMF Occasional Paper No. 261). Washington: International Monetary Fund.10.5089/9781589066380.084Search in Google Scholar
Loayza, N., and H. J. Lopez. 1997. Misalignment and Fundamentals: Equilibrium Exchange Rates in Seven Latin American Countries (Unpublished). Washington: World Bank.Search in Google Scholar
MacDonald, R. 1995. “Long-Run Exchange Rate Modeling: A Survey of Recent Evidence.” Staff Papers, International Monetary Fund 42 (September):437–98.10.2307/3867529Search in Google Scholar
MacDonald, R. 2002. “Modelling Long-Run Real Effective Exchange Rate of the New Zealand Dollar.” Australian Economic Papers 41:519–37.10.1111/1467-8454.00178Search in Google Scholar
MacDonald, R., and L. Ricci. 2003. “Estimation of the Equilibrium Real Exchange Rate for South Africa (IMF Working Paper No. 44). Washington: International Monetary Fund.10.5089/9781451846430.001Search in Google Scholar
MacKinnon, J. G. 1996. “Numerical Distribution Functions for Unit Root and Cointegration Tests.” Journal of Applied Econometrics 11 (6):601–18.10.1002/(SICI)1099-1255(199611)11:6<601::AID-JAE417>3.0.CO;2-TSearch in Google Scholar
McKinnon, R. 1963. “Optimum Currency Areas.” American Economic Review 53 (September):717–24.Search in Google Scholar
Melvin, M. 1985. “The Choice of an Exchange Rate System and Macroeconomic Stability.” Journal of Money, Credit and Banking 17 (Part I) November:467–78.10.2307/1992442Search in Google Scholar
Montiel, P. J. 1997. “Exchange Rate Policies and Macroeconomic Management in ASEAN Countries.” In Macroeconomic Issues Facing ASEAN Countries, edited by J. Hicklin, D. Robinson and A. Singh. Washington: International Monetary Fund.Search in Google Scholar
Montiel, P. J. 1999. “Determinants of the Long-Run Equilibrium Real Exchange Rate: An Analytical Model.” In Exchange Rate Misalignment: Concepts and Measurement for Developing Countries, edited by L. Hinkle and P. Montiel. New York: Oxford University Press for the World Bank.Search in Google Scholar
Mundell, R. 1961. “A Theory of Optimum Currency Areas.” American Economic Review 51 (September):627–65.Search in Google Scholar
Nel, H. F. 2000. Minimum Reserves Requirements. South African Reserve Bank, Working Paper.Search in Google Scholar
Ng, S., and P. Perron. 2001. “Lag Length Selection and the Construction of Unit Root Tests with Good Size and Power.” Econometrica 69:1519–54.10.1111/1468-0262.00256Search in Google Scholar
Obstfeld, M., and K. Rogoff. 1996. Foundations of International Macroeconomics. Cambridge, MA: MIT Press, 199.Search in Google Scholar
Odhiambo, N. M. 2004. Financial Liberalization and Economic Growth in Sub-Saharan African Countries: Dilemmas and Prospects. PhD (Economics), Unpublished Thesis, University of Stellenbosch (South Africa).Search in Google Scholar
Papaioannu, M. G. 2003. Determinants of the Choice of Exchange Rate Regimes in Six Central American Countries: An Empirical Analysis. IMF Working Paper No. WP/03/59.10.5089/9781451847963.001Search in Google Scholar
Pesaran, M. H., and Y. Shin. 1999. “An Autoregressive Distributed Lag Modelling Approach to Cointegration Analysis.” Chapter 11 in Econometrics and Economic Theory in the 20th Century: The Ragnar Frisch Centennial Symposium, edited by S. Strom. Cambridge: Cambridge University Press.Search in Google Scholar
Pesaran, M. H., Y. Shin, and R. J. Smith. 1996. Testing for the Existence of a Long-run Relationship. Working Paper No. 9622. Department of Applied Economics, University of Cambridge.Search in Google Scholar
Pesaran, M. H., Y. Shin, and R. Smith. 2001. “Bounds Testing Approaches to the Analysis of Level Relationships.” Journal of Applied Econometrics 16:289–326.10.1002/jae.616Search in Google Scholar
Ravn, M., and H. Uhlig. 2002. “On Adjusting the Hodrick-Prescott Filter for the Frequency of Observations.” The Review of Economics and Statistics 84 (2):371–5.10.1162/003465302317411604Search in Google Scholar
Rogoff, K. 1996. “The Purchasing Power Parity Puzzle.” Journal of Economic Literature 34 (June):647–68.Search in Google Scholar
Rogoff, K. S., A. M. Husain, A. Mody, R. Brooks, and N. Oomes. 2003. Evolution and Performance of Exchange Rate Regimes. IMF Working Paper No. WP/03/243.10.5089/9781451875843.001Search in Google Scholar
Schwert, W. 1986. “Test for Unit Roots: A Monte Carlo Investigation.” Journal of Business and Economic Statistics 7:147–59.10.3386/t0073Search in Google Scholar
Stein, J. L., P. R. Allen, and Associates. 1995. Fundamental Determinants of Exchange Rates. Oxford: Oxford University Press, Clarendon.Search in Google Scholar
Tornell, A., and A. Velasco. 1995. Fixed versus Flexible Exchange Rates: Which provides More Fiscal Discipline? (NBER Working Paper No. 5108). Cambridge, MA: National Bureau of Economic Research.10.3386/w5108Search in Google Scholar
Whittaker, E. T. 1923. “On a New Method of Graduation.” Proceedings of the Edinburgh Mathematical Association 41:63–75.10.1017/S0013091500077853Search in Google Scholar
Williamson, J. 1994. Estimating Equilibrium Exchange Rates. Washington: Institute for International Economics.Search in Google Scholar
World Bank. 2014. World Development Indicators. http://data.worldbank.org/products/wdi [Accessed 22 July 2014].Search in Google Scholar
van der Merwe, E. J. 1996. Exchange Rate Management Policies in South Africa: Recent Experience and Prospects (Occasional Paper No. 9). South African Reserve Bank.Search in Google Scholar
APPENDIX A
The Fundamental Determinants of Real Effective Exchange Rate in South Africa (1975–2013).
APPENDIX B Some Notes on the Hodrick-Prescott Filter
The Hodrick-Prescott (HP) filter or decomposition is a technique employed in macroeconomics and macroeconometrics to decompose a time series into cyclical and trend components. The technique was proposed by Whittaker (1923). But it was not until the seminal paper of Hodrick and Prescott (1997), when the HP-filter gained immense recognition. The main importance of the HP-filter lies in its ability to provide a smooth-curve representation of a time series which is susceptible to long-run impacts than cyclical fluctuations.
The HP-filter is derived on the basis that a time series, say
According to Hodrick and Prescott (1997), the sum of the squared deviations
©2015 by De Gruyter
