The debate about the equilibrium level of the South African rand and the factors driving the currency is ongoing, with a concomitant lack of consensus on the most appropriate level of the exchange rate. The New Growth Path Framework (2011), which provided government’s blueprint for economic growth and job creation, calls for a more competitive exchange rate that should support government’s initiatives, indicating that policymakers have a vested interest in seeing the exchange rate at a level that would support South Africa’s economic growth. Against this background, the aim of this study was to determine the extent to which the rand’s real effective exchange rate (REER) is misaligned from its equilibrium level. Cointegration techniques in the behavioural equilibrium exchange rate (BEER) framework of Clark and MacDonald (1988) were applied to estimate the equilibrium value of the rand consistent with economic fundamentals, and to interpret the deviation of the observed exchange rate from this level as REER misalignment. This study adds to the literature in the following aspects: firstly, we apply more recent data to estimate the equilibrium REER and exchange rate misalignment. Secondly, the subject of exogeneity in the equilibrium exchange rate model is addressed to ensure a proper specification is obtained. Finally, the study uses non-linear regime switching methodology to model the misalignment behaviour.
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