Inflating our troubles: South Africa’s economic performance and the exchange rate

2 June 2016
Publication Type: Policy Paper
JEL Code: N2, N27, O24

South Africa’s export performance has been disappointing, and this is likely related to weak growth outcomes. We investigate the effect of the exchange rate on these outcomes, through two possible channels: its level and its volatility. We find little evidence in the literature or in our own tests to suggest volatility has been an important factor. The level of the currency appears to be more important, with currency undervaluation apparently favouring growth and exports. This may justify a policy of asymmetric reserve accumulation. An inflation target closer to that of our competitors and trading partners would also help maintain a competitive real exchange rate.

Series title: Policy Paper 22
1 June 2016
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