Exchange Rate Uncertainty Effects on Domestic Investment in South Africa

Hiluf Techane Gidey and Naser Yenus Nuru
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Hiluf Techane Gidey: Hiluf Techane Gidey (corresponding author) is at Adigrat University, Adigrat, Ethiopia
Naser Yenus Nuru: Naser Yenus Nuru is at Adigrat University, Adigrat, Ethiopia; e-mail: nyenus23@gmail.com

Margin: The Journal of Applied Economic Research, 2021, vol. 15, issue 3, 338-352

Abstract: The main goal of this study is to examine the effect of real effective exchange rate uncertainty on domestic investment for the South African economy over the sample period 1985Q1–2019Q2. To address this objective, Jordà ’s (2005) local projection method is employed in this study. The generalised impulse response functions indicate that domestic investment decreases between the second and seventh quarters in response to one standard deviation shock in exchange rate uncertainty. Furthermore, high exchange rate uncertainty affects domestic investment negatively while low exchange rate uncertainty affects domestic investment positively. In other words, domestic investment declines due to a rise in exchange rate uncertainty while a drop in exchange rate uncertainty enhances domestic investment. Regarding the effects of control variables, output and export influences domestic investment positively and significantly. Inflation, however, has a negative and significant effect on domestic investment. Lastly, the Diks–Panchenko nonlinear Granger’s causality confirms bidirectional causality between exchange rate uncertainty and domestic investment. JEL Classification: C32, E22, F31, F41

Keywords: Domestic Investment; Exchange Rate Uncertainty; Generalised Impulse Responses; Local Projection; South Africa (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:sae:mareco:v:15:y:2021:i:3:p:338-352

DOI: 10.1177/09738010211010516

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