The behaviour of the real effective exchange rate of South Africa: is there a misalignment?

The paper uses Behavioural Equilibrium Exchange Rate methodology to estimate the equilibrium real effective exchange rate of the rand and to establish whether the observed exchange rate is misaligned with this level. The exchange rate’s misalignment behaviour is further explored using a regime switching method. Results endorse the existence of a co-integrating relationship between the exchange rate and terms of trade, external openness, capital flows and government expenditure. The study confirms that the exchange rate is from time to time misaligned with the Markov regime switching model, correctly capturing the misalignment as alternative shifts between over- and undervaluation episodes.