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On The Rand: Determinants Of The South African Exchange Rate

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  • Jeffrey Frankel

Abstract

This paper is an econometric investigation of the determinants of the real value of the South African rand over the period 1984‐2007. The results show a relatively good fit. As always with exchange rate equations, there is substantial weight on the lagged exchange rate, which can be attributed to a momentum component. Nevertheless, economic fundamentals are significant and important. This is especially true of an index of the real prices of South African mineral commodities, which even drives out real income as a significant determinant. An implication is that the 2003‐2006 real appreciation of the rand can be attributed to the Dutch Disease. In other respects, the rand behaves like currencies of industrialised countries with well‐developed financial markets. In particular, high South African interest rates raise international demand for the rand and lead to real appreciation, controlling also for a forward‐looking measure of expected inflation and a measure of default risk or country risk.

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  • Jeffrey Frankel, 2007. "On The Rand: Determinants Of The South African Exchange Rate," South African Journal of Economics, Economic Society of South Africa, vol. 75(3), pages 425-441, September.
  • Handle: RePEc:bla:sajeco:v:75:y:2007:i:3:p:425-441
    DOI: 10.1111/j.1813-6982.2007.00130.x
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    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange

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