On The Rand: Determinants of the South African Exchange Rate


Frankel J. On The Rand: Determinants of the South African Exchange Rate. South African Journal of Economics. 2007;73 (3) :425-441.


This paper is an econometric investigation of the determinants of the real value of the South
African rand over the period 1984-2007. The results show a relatively good fit. As always with
exchange rate equations, there is substantial weight on the lagged exchange rate, which can be
attributed to a momentum component. Nevertheless, economic fundamentals are significant and
important. This is especially true of an index of the real prices of South African mineral
commodities, which even drives out real income as a significant determinant. An implication is
that the 2003-2006 real appreciation of the rand can be attributed to the Dutch Disease. In other
respects, the rand behaves like currencies of industrialized countries with well-developed financial
markets. In particular, high South African interest rates raise international demand for the rand
and lead to real appreciation, controlling also for a forward-looking measure of expected inflation
and a measure of default risk or country risk.

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Last updated on 08/21/2014