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On the Rand: Determinants of the South African Exchange Rate

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 so often 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 of the rand's value. An implication is that the 2003-2006 real appreciation can be attributed to the 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, controlling 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 hopes to have improved on earlier studies of the rand.

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File URL: http://www.nber.org/papers/w13050.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13050.

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Date of creation: Apr 2007
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Publication status: published as 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, 09.
Handle: RePEc:nbr:nberwo:13050
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  1. Michael B. Devereux & Charles Engel, 2006. "Expectations and Exchange Rate Policy," NBER Working Papers 12213, National Bureau of Economic Research, Inc.
  2. Ricardo J Caballero & Guido Lorenzoni, 2014. "Persistent Appreciations and Overshooting: A Normative Analysis," IMF Economic Review, Palgrave Macmillan, vol. 62(1), pages 1-47, April.
  3. 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.
  4. Ronald MacDonald & Luca Antonio Ricci, 2003. "Estimation of the Equilibrium Real Exchange Rate for South Africa," IMF Working Papers 03/44, International Monetary Fund.
  5. Frankel, Jeff & Froot, Ken, 1986. "Using Survey Data to Test Standard Propositions Regarding Exchange Rate Expectations," Department of Economics, Working Paper Series qt1972q8wm, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  6. 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.
  7. Goodhart, Charles, 1988. "The Foreign Exchange Market: A Random Walk with a Dragging Anchor," Economica, London School of Economics and Political Science, vol. 55(220), pages 437-60, November.
  8. Ang, Andrew & Bekaert, Geert & Wei, Min, 2007. "Do macro variables, asset markets, or surveys forecast inflation better?," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 1163-1212, May.
  9. 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.
  10. Jeffrey A. Frankel & Kenneth A. Froot, 1985. "Using Survey Data to Test Some Standard Propositions Regarding Exchange Rate Expectations," NBER Working Papers 1672, National Bureau of Economic Research, Inc.
  11. Mark, Nelson C, 1995. "Exchange Rates and Fundamentals: Evidence on Long-Horizon Predictability," American Economic Review, American Economic Association, vol. 85(1), pages 201-18, March.
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