Working Paper: NBER ID: w13050
Authors: 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 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.
Keywords: South African rand; exchange rate; macroeconomics; economic fundamentals
JEL Codes: F31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| lagged exchange rate (F31) | current exchange rate (F31) |
| mineral prices (L72) | real appreciation of the rand (F31) |
| mineral prices (L72) | significance of real income (F61) |
| interest rates (E43) | appreciation of the rand (F31) |
| removal of capital controls in 1995 (F32) | structural break in determinants of the real exchange rate (F31) |