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Has the Exchange Rate Pass-Through changed in South Africa?

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  • Alain Kabundi
  • Asi Mbelu

Abstract

This paper uses the two-stage exchange rate pass-through (ERPT) framework instead of the direct pass-through (PT) from the exchange rate to consumer inflation to assess the variation in the ERPT for South Africa from 1994 to 2014. The paper uses rolling-window estimation to examine the possibility of change in the ERPT over time. In addition, it investigates the asymmetric behaviour of the ERPT over the business cycle. The results indicate that the ERPT for South Africa is complete in the first stage but incomplete in the second stage. It implies that retailers do not pass all the cost to consumers. The fifirst-stage ERPT has declined slightly since the Global Financial Crisis. Weak domestic demand and possibly the concentration of firms in the manufacturing sector are the main forces behind this low PT. Moreover, there is evidence of asymmetry in the fifirst-stage ERPT in that it tends to rise in the upturn phase of the economy compared to the downturn. The second-stage ERPT shows a considerable decline since the adoption of the inflation-targeting regime. Similar to the fifirst-stage case, the PT is muted in the downturn but rises in the expansionary phase by about 10 per cent.

Suggested Citation

  • Alain Kabundi & Asi Mbelu, 2016. "Has the Exchange Rate Pass-Through changed in South Africa?," Working Papers 649, Economic Research Southern Africa.
  • Handle: RePEc:rza:wpaper:649
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    References listed on IDEAS

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    Cited by:

    1. Ha, Jongrim & Marc Stocker, M. & Yilmazkuday, Hakan, 2020. "Inflation and exchange rate pass-through," Journal of International Money and Finance, Elsevier, vol. 105(C).
    2. Mavikela Nomahlubi & Mhaka Simba & Phiri Andrew, 2019. "The Inflation-Growth Relationship in SSA Inflation-Targeting Countries," Studia Universitatis Babeș-Bolyai Oeconomica, Sciendo, vol. 64(2), pages 84-102, August.
    3. Kabundi, Alain & Mlachila, Montfort, 2019. "The role of monetary policy credibility in explaining the decline in exchange rate pass-through in South Africa," Economic Modelling, Elsevier, vol. 79(C), pages 173-185.
    4. Byron Botha & Lauren Kuhn & Daan Steenkamp, 2020. "Working Paper WP2007 Is the Phillips curve framework still useful for understanding inflation dynamics in South Africa," Working Papers 10211, South African Reserve Bank.

    More about this item

    Keywords

    Exchange rate pass-through; rolling-window regression; symmetric exchange rate pass-through;

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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