Internal Versus External Reasons for the Rand-Dollar Exchange Rate Volatility
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Date
2016
Journal Title
Journal ISSN
Volume Title
Publisher
University of the Western Cape
Abstract
Increased exchange rate volatility is an impediment to the health of the economy of a country.
Following the 1995 policy shift made by the South African Reserve Bank, from a fixed
exchange rate regime to a free floating exchange rate regime; the rand/dollar exchange rate
became volatile. The aim of the study was to investigate the forces that lead the exchange rate
volatility. In more details, the study looked at the relationship between the rand/dollar
exchange rate and its determinants. In terms of the methodology, a Structural Vector
Autoregressive (SVAR) model was used to analyse the relationship between the rand/dollar
exchange rate and its determinants.
In the short run, the impulse response function results showed that there were no strong bidirectional
relationships between the rand/dollar and its determinants between 1995 and
2014. The only significant relationship, in the short run, was found to be between the
exchange rate and nominal variables. Another significant impact was that of the exchange
rate on the 10-year bond spread. The long-run test results suggested that there is a unilateral
relationship between the rand/dollar exchange rate and the 10-year bond spread. The long-run
tests results indicated that the rand/dollar exchange rate is indeed an �equity� currency, and is
mostly driven by changes in the financial variables.
Description
Magister Commercii - MCom (Economics)