Exchange rate undervaluation and economic growth in South Africa: evidence from various transmission mechanisms

Abstract

The present study aims to examine the relationship between exchange rate undervaluation and economic growth in South Africa, focusing on the various transmission mechanisms through which this relationship occurs. Through the adoption of secondary quarterly data spanning the period 1980 to 2018 and a two-step Generalised Method of Moments approach. The study estimated a Behavioural Equilibrium Exchange Rate of South Africa and used it to construct a measure of Exchange rate undervaluation. Further, the study examined the effects of Exchange rate undervaluation on the tradable sector, the savings/capital accumulation sector, and the total factor productivity sector. The study found evidence of the tradable sector and total factor productivity (TFP) channels in South Africa. Therefore, we conclude that there exist valuable lessons to be learnt through the analysis of this relationship on a micro level compared to a macro level. Macro-level studies overlook the individual effects, hence why results have been inconclusive. This, therefore, means that South Africa has an incentive to keep the Rand at a competitive level since the industrial and agricultural sectors benefit from a competitive Exchange rate.

Keywords: {'name': 'Exchange rate undervaluations'}, {'name': 'Generalized Methods of Moments'}, {'name': 'Transmission mechanism'}, {'name': 'sectoral analyses'}

Authors & affiliations

Malibongwe Nyathi
Tshwane University of Technology

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