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Sources of Nominal Exchange Rate Fluctuations in South Africa

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  • Jan Gottschalk
  • Ashok Bhundia
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    Abstract

    This paper investigates the sources of fluctuations in the rand-U.S. dollar exchange rate in 2001 and 2002 using an empirical exchange rate model which identifies aggregate supply, aggregate demand, and nominal disturbances as possible sources for exchange rate fluctuations. According to our results, nominal disturbances explain by far most of the rand depreciation in the final quarter of 2001. The fact that the nominal effective exchange rate also depreciated sharply suggests the nominal disturbances were domestically generated. From a preliminary examination of the relative movements in policy interest rates in South Africa and the United States, along with growth rates in both narrow and broad monetary aggregates in South Africa, it is difficult to isolate the underlying cause of the nominal disturbances in 2001 and 2002. Clearly, the task remains a challenging one with the empirical tools available.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 03/252.

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    Length: 25
    Date of creation: 01 Dec 2003
    Date of revision:
    Handle: RePEc:imf:imfwpa:03/252

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    Related research

    Keywords: Exchange rates; Economic models; Prices; exchange rate; nominal exchange rate; real exchange rate; monetary policy; exchange rate fluctuations; relative price; effective exchange rate; price level; nominal effective exchange rate; dollar exchange rate; effective exchange rates; aggregate demand; inflation; money supply; money growth; exchange rate dynamics; real exchange rate fluctuations; current account balance; relative prices; increase in inflation; foreign exchange; exchange rate depreciation; nominal variables; exchange rate regime; foreign exchange market; foreign currency;

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    1. Lane, Philip R., 1999. "The New Open Economy Macroeconomics: a Survey," CEPR Discussion Papers 2115, C.E.P.R. Discussion Papers.
    2. Richard Clarida & Jordi Gali, 1994. "Sources of real exchange rate fluctuations: how important are nominal shocks?," Proceedings, Federal Reserve Bank of Dallas, issue Apr.
    3. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    4. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-76, December.
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    Cited by:
    1. Katie Farrant & Gert Peersman, 2005. "Accounting for the source of exchange rate movements: new evidence," Bank of England working papers 269, Bank of England.

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