The Consequences of Policy Uncertainty: Disconnects and Dilutions in the South African Real Effective Exchange Rate-Export Relationship

Sandile Hlatshwayo and Magnus Saxegaard

No 2016/113, IMF Working Papers from International Monetary Fund

Abstract: In recent years, the link between the real effective exchange rate (REER) and exports in South Africa has weakened. While exports still rise in response to REER depreciations, the REER-export elasticity is below historical estimates. The literature has put forward a number of possible explanations, from multi-national supply-chains to muted exchange rate pass-through. This research explores the role of policy uncertainty in reducing the responsiveness of exports to relative price changes. We construct a novel “news chatter” measure of policy uncertainty and examine how it, paired with other supply-side constraints, can improve our understanding of export performance. We find that increased policy uncertainty diminishes the responsiveness of exports to the REER and has short and long-run level effects on export performance. Finally, we show that a measure of competitiveness that adjusts for uncertainty and supply-side constraints greatly outperforms the REER in tracking exports performance.

Keywords: WP; policy uncertainty; economic policy; export volume; price elasticity; Competitiveness; Exports; Real Effective Exchange Rate; export market entry cost; weighted index; REER-export relationship; export price elasticity; price responsiveness; export responsiveness; uncertainty search algorithm; responsiveness of export; uncertainty-a direct effect; demand function; Real effective exchange rates; Electricity; Export prices; Export performance; Africa (search for similar items in EconPapers)
Pages: 30
Date: 2016-06-09
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Citations: View citations in EconPapers (21)

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