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The Exchange Rate Pass-Through: Evidence of South Africa

Author

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  • Nozipho Sinenhlanhla DUBE
  • Simiso MSOMI

    (University of KwaZulu Natal
    University of KwaZulu Natal)

Abstract

Understanding the role of the exchange rate behaviour in domestic prices is crucial for monetary authorities in anticipating inflation. Over the last 28 years (1994 – 2022), the inflation rate in South Africa has increased, averaging at 5.7% per year. It is believed that some of the increase in the inflation rate is a result of trade, hence this study aims at identifying how much of the changes in the exchange rate is passed on to domestic inflation. This idea is of interest in a country like South Africa that had implemented inflation targeting. The study identifies two channels of the exchange rate pass-through (ERPT); direct and indirect. the direct involves the change in import prices that is associated with the change in the exchange rate. The indirect channel involves the change in consumer price index (CPI) and the producer price index (PPI) that is associated with a change in import prices. The study uses monthly data from 1994 – 2022 to identify the speed and the magnitude of the exchange rate pass-through to domestic prices in the short-run and the long-run. Using the vector autoregressive model (VAR) and the vector error correction model the results shows that the magnitude of the exchange rate pass-through to import prices is relatively higher than the exchange pass-through to the CPI and PPI and that import prices; CPI and PPI increases immediately after an increase in the exchange rate.

Suggested Citation

  • Nozipho Sinenhlanhla DUBE & Simiso MSOMI, 2025. "The Exchange Rate Pass-Through: Evidence of South Africa," Journal of Economics and Financial Analysis, Tripal Publishing House, vol. 9(1), pages 23-47.
    • Handle: RePEc:trp:01jefa:jefa0079
    DOI: 10.1991/jefa.v9i1.a75
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    References listed on IDEAS

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    1. Choudhri, Ehsan U. & Hakura, Dalia S., 2006. "Exchange rate pass-through to domestic prices: Does the inflationary environment matter?," Journal of International Money and Finance, Elsevier, vol. 25(4), pages 614-639, June.
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    3. Gust, Christopher & Leduc, Sylvain & Vigfusson, Robert, 2010. "Trade integration, competition, and the decline in exchange-rate pass-through," Journal of Monetary Economics, Elsevier, vol. 57(3), pages 309-324, April.
    4. Rebucci, Alessandro, 2010. "Estimating VARs with long stationary heterogeneous panels: A comparison of the fixed effect and the mean group estimators," Economic Modelling, Elsevier, vol. 27(5), pages 1183-1198, September.
    5. Taiwo Ajilore & Sylvanus Ikhide, 2013. "Monetary policy shocks, output and prices in South Africa: a test of policy irrelevance proposition," Journal of Developing Areas, Tennessee State University, College of Business, vol. 47(2), pages 363-386, July-Dece.
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    More about this item

    Keywords

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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