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Is the Rand Really Decoupled from Economic Fundamentals?

Author

Listed:
  • Mehmet Balcilar

    (Department of Economics, Eastern Mediterranean University, Famagusta, Northern Cyprus , via Mersin 10, Turkey)

  • Rangan Gupta

    (Department of Economics, University of Pretoria)

  • Charl Jooste

    (Department of Economics, University of Pretoria)

Abstract

We analyse the relationship between the South African real exchange rate and economic fundamentals - demand, supply and nominal shocks. Using a time-varying parameter VAR we study the coherence, conditional volatility and impulse responses of the exchange rate over specific periods and policy regimes. The model is identified using sign-restrictions that allow for some neutrality of impulse responses over contemporaneous and long horizons. Our results suggest that the importance of fundamental shocks on the exchange rate is time dependent. Hence there is a loss in information when using standard linear models that average out effects over time. The response of the exchange rate to demand and supply shocks have weakened over the 1994-2010 period. The period following financial crisis, however, has strengthened the relationship between supply and demand shocks to the exchange rate, but has weakened the relationship between interest rate shocks and the exchange rate response.

Suggested Citation

  • Mehmet Balcilar & Rangan Gupta & Charl Jooste, 2014. "Is the Rand Really Decoupled from Economic Fundamentals?," Working Papers 201439, University of Pretoria, Department of Economics.
    • Handle: RePEc:pre:wpaper:201439
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Exchange rates; fundamentals; coherence; sign-restricted TVP-VAR;
    All these keywords.

    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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