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Is the Rand Really Decoupled from Economic Fundamentals?

Mehmet Balcilar, Rangan Gupta and Charl Jooste

No 201439, Working Papers from University of Pretoria, Department of Economics

Abstract: We analyse the relationship between the South African real exchange rate and economic fundamentals - demand, supply and nominal shocks. Using a time-varying parameter VAR we study the coherence, conditional volatility and impulse responses of the exchange rate over specific periods and policy regimes. The model is identified using sign-restrictions that allow for some neutrality of impulse responses over contemporaneous and long horizons. Our results suggest that the importance of fundamental shocks on the exchange rate is time dependent. Hence there is a loss in information when using standard linear models that average out effects over time. The response of the exchange rate to demand and supply shocks have weakened over the 1994-2010 period. The period following financial crisis, however, has strengthened the relationship between supply and demand shocks to the exchange rate, but has weakened the relationship between interest rate shocks and the exchange rate response.

Keywords: Exchange rates; fundamentals; coherence; sign-restricted TVP-VAR (search for similar items in EconPapers)
JEL-codes: C3 F41 (search for similar items in EconPapers)
Pages: 13 pages
Date: 2014-08
New Economics Papers: this item is included in nep-cba
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