Determinants of the real exchange rate in South Africa

Abstract

The real exchange rate is a key policy variable in South Africa’s open economy. A cointegration framework is used with single equation equilibrium correction models to investigate the short-run and long-run equilibrium determinants of the quarterly real exchange rate, 1970:1–1995:1. The cointegrated equilibrium is obtained from a theoretical model characterising equilibrium as the achievement of internal and external balance for sustainable capital flows and trade and tax regimes, and given terms of trade and technology. For a spectrum of exchange rate regimes, we discuss the evolution of a broad range of theoretical economic fundamentals and short-run policy factors.

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