Does South Africa Suffer from the ‘Fear of Float’ Syndrome? An Analysis of the Efficacy and Challenges of a Managed Floating Exchange Rate Regime with Financial Integration

Olano Makhubela
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Olano Makhubela: Department of Economics, SOAS University of London, UK

No 138, Working Papers from Department of Economics, SOAS University of London, UK

Abstract: The paper examines whether South Africa suffers from a ‘fear of float’ syndrome. The analysis also covers the efficacy and challenges of a managed floating exchange rate regime. I use time series data, volatility equations and ARCH models to test the volatility of South Africa’s exchange rate, interest rate and foreign exchange reserves. Evidence shows that South Africa has volatile interest and exchange rates, but not foreign exchange reserves. Yet, South Africa does not seem to suffer from an extreme and chronic form of ‘fear of floating’. South Africa requires financial integration to finance its current account deficits and to complement its low savings rate. Yet, evidence indicates that both capital account openness and foreign exchange control liberalization have no robust impact on growth. The authorities’ intervention in the 2001 currency crisis did not help. Hence, I recommend that South Africa should use interest rates early to target both inflation and foreign exchange rates. Challenges remain in the form of relatively high interest rates, volatile capital flows, perceptions, destabilizing speculation, and loopholes in foreign exchange controls.

Pages: 73 pages
Date: 2004-08
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