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The role of the rand as a shock absorber

Author

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  • Daan Steenkamp
  • Luchelle Soobyah

Abstract

This paper investigates the impact of rand shocks on industry output and various other South African macroeconomic variables. We use a factor augmented model, which has the key advantage of providing a rich narrative about the disaggregated impacts of exchange rate shocks. We show that the currency tends to react to changes in the relative fundamentals of the economy, such as those captured by commodity export prices, and that the independent impact on the economy of exchange rate changes that are unrelated to fundamentals is estimated to be small. The results suggest that the exchange rate tends to act as a shock absorber to the shocks that hit the economy; a large proportion of the variation in the rand can be explained by other shocks, while rand shocks themselves explain a relatively small proportion of South Africas macroeconomic volatility. That said, the role that the exchange rate plays as a shock absorber appears to be weaker in South Africa than for other commodity exporters like Australia and New Zealand.
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Suggested Citation

  • Daan Steenkamp & Luchelle Soobyah, 2019. "The role of the rand as a shock absorber," ERSA Working Paper Series 790, Economic Research Southern Africa.
    • Handle: RePEc:rza:ersawp:790
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    Cited by:

    1. is not listed on IDEAS
    2. Christopher Loewald, 2021. "Macro works applying integrated policy frameworks to South Africa," Working Papers 11016, South African Reserve Bank.
    3. Christopher Loewald, 2021. "Macro works a decisiontree approach to exchange rate policy," Working Papers 11009, South African Reserve Bank.
    4. Matthew Greenwood-Nimmo & Daan Steenkamp & Rossouw van Jaarsveld, 2021. "Risk and Return Spillovers in a Global Model of the Foreign Exchange Network," Working Papers 11014, South African Reserve Bank.
    5. Patrick Honohan & Athanasios Orphanides, 2022. "Monetary policy in South Africa, 2007-21," WIDER Working Paper Series wp-2022-29, World Institute for Development Economic Research (UNU-WIDER).
    6. Sibande, Xolani, 2024. "Herding behaviour and monetary policy: Evidence from the ZAR market," Journal of Behavioral and Experimental Finance, Elsevier, vol. 42(C).
    7. Guest, Oliver & Steenkamp, Daan, 2026. "Is the rand at fair value?," EconStor Research Reports 336005, ZBW - Leibniz Information Centre for Economics.
    8. Ricardo Hausmann & Federico Sturzenegger & Patricio Goldstein & Frank Muci & Douglas Barrios, 2022. "Macroeconomic risks after a decade of microeconomic turbulence: South Africa (2007-2020)," WIDER Working Paper Series wp-2022-3, World Institute for Development Economic Research (UNU-WIDER).

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    JEL classification:

    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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