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Exchange Rate Uncertainty Effects on Domestic Investment in South Africa

Author

Listed:
  • Hiluf Techane Gidey

    (Hiluf Techane Gidey (corresponding author) is at Adigrat University, Adigrat, Ethiopia)

  • Naser Yenus Nuru

    (Naser Yenus Nuru is at Adigrat University, Adigrat, Ethiopia; e-mail: nyenus23@gmail.com)

Abstract

The main goal of this study is to examine the effect of real effective exchange rate uncertainty on domestic investment for the South African economy over the sample period 1985Q1–2019Q2. To address this objective, Jordà ’s (2005) local projection method is employed in this study. The generalised impulse response functions indicate that domestic investment decreases between the second and seventh quarters in response to one standard deviation shock in exchange rate uncertainty. Furthermore, high exchange rate uncertainty affects domestic investment negatively while low exchange rate uncertainty affects domestic investment positively. In other words, domestic investment declines due to a rise in exchange rate uncertainty while a drop in exchange rate uncertainty enhances domestic investment. Regarding the effects of control variables, output and export influences domestic investment positively and significantly. Inflation, however, has a negative and significant effect on domestic investment. Lastly, the Diks–Panchenko nonlinear Granger’s causality confirms bidirectional causality between exchange rate uncertainty and domestic investment. JEL Classification: C32, E22, F31, F41

Suggested Citation

  • Hiluf Techane Gidey & Naser Yenus Nuru, 2021. "Exchange Rate Uncertainty Effects on Domestic Investment in South Africa," Margin: The Journal of Applied Economic Research, National Council of Applied Economic Research, vol. 15(3), pages 338-352, August.
    • Handle: RePEc:sae:mareco:v:15:y:2021:i:3:p:338-352
    DOI: 10.1177/09738010211010516
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    References listed on IDEAS

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    More about this item

    Keywords

    Domestic Investment; Exchange Rate Uncertainty; Generalised Impulse Responses; Local Projection; South Africa;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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