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Does South Africa Suffer from the ‘Fear of Float’ Syndrome? An Analysis of the Efficacy and Challenges of a Managed Floating Exchange Rate Regime with Financial Integration

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  • Olano MAKHUBELA

    (Department of Economics, SOAS, University of London, UK)

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    Abstract

    The paper examines whether South Africa suffers from a ‘fear of float’ syndrome. The analysis also covers the efficacy and challenges of a managed floating exchange rate regime. I use time series data, volatility equations and ARCH models to test the volatility of South Africa’s exchange rate, interest rate and foreign exchange reserves. Evidence shows that South Africa has volatile interest and exchange rates, but not foreign exchange reserves. Yet, South Africa does not seem to suffer from an extreme and chronic form of ‘fear of floating’. South Africa requires financial integration to finance its current account deficits and to complement its low savings rate. Yet, evidence indicates that both capital account openness and foreign exchange control liberalization have no robust impact on growth. The authorities’ intervention in the 2001 currency crisis did not help. Hence, I recommend that South Africa should use interest rates early to target both inflation and foreign exchange rates. Challenges remain in the form of relatively high interest rates, volatile capital flows, perceptions, destabilizing speculation, and loopholes in foreign exchange controls.

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    File URL: http://www.soas.ac.uk/economics/research/workingpapers/file28841.pdf
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    Bibliographic Info

    Paper provided by Department of Economics, SOAS, University of London, UK in its series Working Papers with number 138.

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    Length: 73 pages
    Date of creation: Aug 2004
    Date of revision:
    Handle: RePEc:soa:wpaper:138

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    Web page: http://www.soas.ac.uk/economics/
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    1. Hausmann, Ricardo & Panizza, Ugo & Stein, Ernesto, 2001. "Why do countries float the way they float?," Journal of Development Economics, Elsevier, vol. 66(2), pages 387-414, December.
    2. Carmen M. Reinhart & Kenneth S. Rogoff, 2002. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," NBER Working Papers 8963, National Bureau of Economic Research, Inc.
    3. Frankel, Jeffrey A. & Fajnzylber, Eduardo & Schmukler, Sergio L. & Serven, Luis, 2001. "Verifying exchange rate regimes," Journal of Development Economics, Elsevier, vol. 66(2), pages 351-386, December.
    4. Sebastian Edwards & Miguel A. Savastano, 1999. "Exchange Rates in Emerging Economies: What Do We Know? What Do We Need to Know?," NBER Working Papers 7228, National Bureau of Economic Research, Inc.
    5. Dani Rodrik & Andres Velasco, 1999. "Short-Term Capital Flows," NBER Working Papers 7364, National Bureau of Economic Research, Inc.
    6. Michael D. Bordo & Marc Flandreau, 2001. "Core, Periphery, Exchange Rate Regimes, and Globalization," NBER Working Papers 8584, National Bureau of Economic Research, Inc.
    7. Jeffrey A. Frankel, 1999. "No Single Currency Regime is Right for All Countries or At All Times," NBER Working Papers 7338, National Bureau of Economic Research, Inc.
    8. Taylor, Lance, 1994. "Gap models," Journal of Development Economics, Elsevier, vol. 45(1), pages 17-34, October.
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