Trade flows and the exchange rate in South Africa

Lawrence Edwards and Robert Garlick

MPRA Paper from University Library of Munich, Germany

Abstract: The exchange rate plays a central role in public debate around trade and trade policy in South Africa. The general view is that depreciation enhances export competitiveness, encourages export diversification, protects domestic industries from imports and ultimately improves the trade balance. This paper reviews the theoretical and empirical relationship between the exchange rate and trade flows in South Africa. Trade volumes are found to be sensitive to real exchange rate movements but nominal depreciations have a limited long-run impact on trade volumes and the trade balance, as real effects are offset by domestic inflation. Policy should not focus on the exchange rate, but on the fundamental determinants of the profitability and competitiveness of domestic exporters and import competing industries: productivity enhancement, infrastructure, constraints to business operations and production costs, including labour costs.

Keywords: Exchange rate; South Africa; international trade (search for similar items in EconPapers)
JEL-codes: F1 F14 F32 (search for similar items in EconPapers)
Date: 2008-01
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Citations: View citations in EconPapers (6)

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