Has the Exchange Rate Pass-Through changed in South Africa?

Working paper 649
Alain Kabundi and Asi Mbelu
Publication date: 
November, 2016
This paper uses the two-stage exchange rate pass-through (ERPT) framework instead of the direct pass-through (PT) from the exchange rate to consumer inflation to assess the variation in the ERPT for South Africa from 1994 to 2014. The paper uses rolling-window estimation to examine the possibility of change in the ERPT over time. In addition, it investigates the asymmetric behaviour of the ERPT over the business cycle. The results indicate that the ERPT for South Africa is complete in the …rst stage but incomplete in the second stage. It implies that retailers do not pass all the cost to consumers. The …first-stage ERPT has declined slightly since the Global Financial Crisis. Weak domestic demand and possibly the concentration of …rms in the manufacturing sector are the main forces behind this low PT. Moreover, there is evidence of asymmetry in the …first-stage ERPT in that it tends to rise in the upturn phase of the economy compared to the downturn. The second-stage ERPT shows a considerable decline since the adoption of the in‡ation-targeting regime. Similar to the fi…rst-stage case, the PT is muted in the downturn but rises in the expansionary phase by about 10 per cent.
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