The real exchange rate of the rand and competitiveness of South Africa's trade
In the last 10 years since South Africa transformed into a democracy, the rand has seen an increase in volatility of its real exchange rate. These fluctuations in the rand’s real exchange rate have raised questions as to whether they signify significant misalignment of the currency and thereby undermine competitiveness of South Africa’s exports abroad. This is a pertinent question in the South African context because foreign trade has been critical to the growth of the economy. Efforts to address current high levels of unemployment and widespread poverty among the majority of the population have depended upon this growth. This study investigates the extent to which fluctuations in the rand’s real exchange rate have impacted on the competitiveness of South African trade flows by determining whether, at some point, the rand had been misaligned, and the likely consequences of such a misalignment. Using data from 1972 to 2003, and an equilibrium correction model of the rand’s real exchange rate drawn on existing literature, the study finds that, from 1994 to 1996, and also in 1998, the rand’s real exchange rate became undervalued by an average 10%. By early 2002, the extent of overshooting had reached 20%. However, the strong recovery of the rand at the start of 2002 reversed this overshooting and instead pushed the real exchange rate above its equilibrium by an average 16 to 17% at the end of 2003. This suggests significant loss of trade competitiveness during 2003 and needed a nominal depreciation to correct the imbalance.
|Date of creation:||15 Dec 2006|
|Contact details of provider:|| Postal: Ludwigstraße 33, D-80539 Munich, Germany|
Web page: https://mpra.ub.uni-muenchen.de
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-1072, June.
- Steven A. Symansky & Peter B. Clark & Leonardo Bartolini & Tamim Bayoumi, 1994. "Exchange Rates and Economic Fundamentals; A Framework for Analysis," IMF Occasional Papers 115, International Monetary Fund.
- Peter J Montiel & Bijan B. Aghevli & Mohsin S. Khan, 1991. "Exchange Rate Policy in Developing Countries; Some Analytical Issues," IMF Occasional Papers 78, International Monetary Fund.
- Gonzalo, Jesus & Granger, Clive W J, 1995.
"Estimation of Common Long-Memory Components in Cointegrated Systems,"
Journal of Business & Economic Statistics,
American Statistical Association, vol. 13(1), pages 27-35, January.
- Gonzalo, J. & Granger, C., 1992. "Estimation of Common Long-Memory Components in Cointegrated Systems," Papers 4, Boston University - Department of Economics.
- Tom Doan, "undated". "RATS programs to replicate Gonzalo and Granger JBES 1995 paper," Statistical Software Components RTZ00074, Boston College Department of Economics.
- Osterwald-Lenum, Michael, 1992. "A Note with Quantiles of the Asymptotic Distribution of the Maximum Likelihood Cointegration Rank Test Statistics," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 461-472, August.
- Tarhan Feyzioglu, 1997. "Estimating the Equilibrium Real Exchange Rate; An Application to Finland," IMF Working Papers 97/109, International Monetary Fund.
- Ronald Macdonald, 1995.
"Long-Run Exchange Rate Modeling: A Survey of the Recent Evidence,"
IMF Staff Papers,
Palgrave Macmillan, vol. 42(3), pages 437-489, September.
- Ronald MacDonald, 1995. "Long-Run Exchange Rate Modeling; A Survey of the Recent Evidence," IMF Working Papers 95/14, International Monetary Fund.
- By Gunnar Jonsson, 2001. "Inflation, Money Demand, and Purchasing Power Parity in South Africa," IMF Staff Papers, Palgrave Macmillan, vol. 48(2), pages 2-2.
- Pesaran, M. Hashem & Shin, Yongcheol & Smith, Richard J., 2000.
"Structural analysis of vector error correction models with exogenous I(1) variables,"
Journal of Econometrics,
Elsevier, vol. 97(2), pages 293-343, August.
- Pesaran, M. H. & Shin, Y. & Smith, R. J., 1997. "Structural Analysis of Vector Error Correction Models with Exogenous I(1) Variables," Cambridge Working Papers in Economics 9706, Faculty of Economics, University of Cambridge.
- Mohammad Hashem Pesaran & Richard J Smith & Yongcheol Shin, 1999. "Structural analysis of vector error correction models with exogenous I(1) variables," ESE Discussion Papers 38, Edinburgh School of Economics, University of Edinburgh.
- Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501, December.
- Vincent Koen & Laurence Boone & Alain de Serres & Nicola Fuchs, 2001. "Tracking the Euro," OECD Economics Department Working Papers 298, OECD Publishing.
- Ronald MacDonald & Peter B. Clark, 1998. "Exchange Rates and Economic Fundamentals; A Methodological Comparison of BEERs and FEERs," IMF Working Papers 98/67, International Monetary Fund.
When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:1192. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joachim Winter)
If references are entirely missing, you can add them using this form.