Determining the threshold of the exchange rate instability for South Africa

Despite extensive literature, understanding exchange rate dynamics remains a challenging subject in the macroeconomics literature. For instance, the South African rand against the USA dollar has constantly experienced depreciating exchange rates since the 1960s. In the early 2000s, a rapid exchange rate depreciation led to the formation of the Myburgh Commission to investigate the causes of the exchange rate depreciation. However, the commission failed to point out the causes of the unexpected movement of the exchange rate. This study uses the SETAR model to determine the threshold value at which the exchange rate movement can be considered as exhibiting unusual behaviour. Thus, if the exchange rate movement exceeds the particular threshold value, then it is associated with a higher risk of exchange rate instability. The study established that when the exchange rate depreciates by more than 1.905% points, there is a higher risk of instability for the rand. Furthermore, the study finds that the South African exchange rate is currently in an unstable state.