F31

Foreign Exchange

A New Keynesian DSGE model for Low Income Economies with Foreign Exchange Constraints

The existing literature is clear that low income economies tend to suffer from foreign exchange shortages exacerbated by their exports. Most importantly, the concentration of their exports renders these countries susceptible to international price fluctuations. This frequently affects the level of foreign exchange, causing excess demand for foreign exchange leading to foreign exchange shortages.

The role of the rand as a shock absorber

This paper investigates the impact of rand shocks on industry output and various other South African macroeconomic variables. We use a factor augmented model, which has the key advantage of providing a rich narrative about the disaggregated impacts of exchange rate shocks. We show that the currency tends to react to changes in the relative fundamentals of the economy, such as those captured by commodity export prices, and that the independent impact on the economy of exchange rate changes that are unrelated to fundamentals is estimated to be small.

Fiscal Policy and Adjustment in a Foreign Exchange Constrained Economy: Evidence from Malawi

Most of the recent literature analysing the adjustments of macroeconomic variables to fiscal policy shocks rely on the inclusion of non-Ricardian households to generate a positive response of consumption to an increase in government spending. This paper examines the dynamic effects of government financing behaviour in a foreign exchange constrained low income economy on key macroeconomic aggregates such as output, consumption, wages and labour supply.

The J–Curve Phenomenon: Evidence from Commodity Trade Between South Africa and the United States

Previous studies on the J–curve phenomenon for South Africa have been carried out using either aggregate trade data between South Africa and the rest of the world or between South Africa and her major trading partners. The evidence of J-curve effects in South Africa's bilateral trade have been mixed. In this paper, we revisit this issue by examining the short- and long-run effects of exchange rate changes on trade flows in the context of disaggregated industry data on bilateral trade between South Africa and the United States.

Order flow and rand/dollar exchange rate dynamics

This paper uses the microstructure approach for the South African foreign exchange market to determine the impact of order flow on the rand/US dollar exchange rate over the short and long term. A hybrid model which combines microeconomic and macroeconomic fundamental determinants of the exchange
rate has been adopted. The analysis uses monthly series from January 2004 to December 2016. We find that order flow explains movements in the exchange rate, both in the short and in the long term. The speed of adjustment from short-term deviations is relatively slow.

Real Exchange Rate Volatility and Employment Growth in South Africa: The Case of Manufacturing

This paper investigates the effect of exchange rate volatility on employment growth in South Africa, a country that is characterised by high rates of unemployment and relatively high exchange rate volatility. Employing the Autoregressive Distributed Lag (ARDL) cointegration method over the period 1995Q3 to 2015Q2 and using a variety of specifications, results show that real exchange rate volatility has a significant contractionary effect on manufacturing employment growth.

Disentangling the exchange rate risk, sectoral export flows and financial development nexus

This paper examines the differential responses of various emerging market export sectors to exchange rate risk. This paper finds origin in initial theoretical posits of Ethier (1973) and Clark (1973) which both contend that exchange rate risk has a negative impact on the export flows of international trade participants who are assumed to be inherently risk averse.

Nonlinearities in Financial Development–Economic Growth Nexus: Evidence from sub–Saharan Africa (SSA)

The impact of financial development on economic growth has received much attention in recent literature. However, there are potential discontinuities mediating finance–growth nexus that existing empirical studies have not rigorously examined. This study investigates whether the impact of finance on economic growth is conditioned on the initial levels of countries’ income per capita, human capital and financial development for 29 sub–Saharan Africa countries over the period 1980–2014 using a sample splitting and threshold estimation technique.

Equilibrium Exchange Rates and Misalignments: The Case of Homogenous Emerging Market Economies

We compute the exchange rate misalignment for a set of emerging economies between 1980 and 2013 using the behavioural equilibrium exchange rate definition. The real equilibrium exchange rate is constructed using a parsimonious model and estimators that are robust to cross-sectional independence and small sample size bias. We find that these countries tend to intervene to avoid real appreciation of their currencies following a rise in relative productivity, casting doubt on the Balassa-Samuelson effect.

Modelling exchange rate volatility dynamics: Empirical evidence from South Africa

In this paper, we extend the literature on modelling exchange rate volatility in South Africa by estimating a range of models, including some that attempt to account for structural breaks and long memory. We examine the key nominal exchange rates of the South African rand and replicate common findings in the literature; particularly that volatility is ‘persistent’. We investigate whether this ‘persistence’ is due to structural breaks or long memory, and the extent of asymmetric responses of the rand to ‘good news’ and ‘bad news’.

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