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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 1984-2006. 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 Dutch Disease. In other respects, the rand behaves like currencies of industrialized countries with well-developed financial markets. In particular, high South African interest rates raise international demand for the rand and lead to real appreciation, once one also controls for a forward-looking measure of expected inflation and a measure of default risk or country risk. It is in the latter respects, in particular, that the paper purports to improve on earlier studies of the rand.

Suggested Citation

  • Jeffrey Frankel, 2007. "On the Rand: Determinants of the South African Exchange Rate," CID Working Papers 139, Center for International Development at Harvard University.
  • Handle: RePEc:cid:wpfacu:139
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    References listed on IDEAS

    as
    1. Frankel, Jeffrey A & Froot, Kenneth A, 1987. "Using Survey Data to Test Standard Propositions Regarding Exchange Rate Expectations," American Economic Review, American Economic Association, vol. 77(1), pages 133-153, March.
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    3. Ricardo J Caballero & Guido Lorenzoni, 2014. "Persistent Appreciations and Overshooting: A Normative Analysis," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 62(1), pages 1-47, April.
    4. Stokke, Hildegunn E., 2008. "Resource boom, productivity growth and real exchange rate dynamics -- A dynamic general equilibrium analysis of South Africa," Economic Modelling, Elsevier, vol. 25(1), pages 148-160, January.
    5. Kauffman, Kyle & Weerapana, Akila, 2006. "The Impact of AIDS-Related News on Exchange Rates in South Africa," Economic Development and Cultural Change, University of Chicago Press, vol. 54(2), pages 349-368, January.
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    8. Janine Aron & Ibrahim Elbadawi & Brian Kahn, 1998. "Determinants of the real exchange rate in South Africa," CSAE Working Paper Series 1997-16, Centre for the Study of African Economies, University of Oxford.
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    11. Janine Aron & Ibrahim Elbadawi, 1999. "Reflections on the South African rand crisis of 1996 and its consequences," CSAE Working Paper Series 1999-13, Centre for the Study of African Economies, University of Oxford.
    12. Mtonga, Elvis, 2006. "The real exchange rate of the rand and competitiveness of South Africa's trade," MPRA Paper 1192, University Library of Munich, Germany.
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    More about this item

    Keywords

    South Africa; Rand; Commodity Currency; Dutch Disease; Mineral Prices; Country Risk;
    All these keywords.

    JEL classification:

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

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