Professors Bela Balassa and Paul Samuelson (1964) have made a significant contribution to the theories of exchange rate by bringing a new thinking to the most popular exchange rate model, Purchasing Power Parity (PPP). They have elucidated the contribution of productivity in the determination of PPP. Accordingly, the emphasis of this thesis is Balassa and Samuelson’s Productivity Bias Hypothesis (PBH) in Purchasing Power Parity (PPP) and the application thereof to South Africa and Switzerland for the period 1994Q1 -2003Q4. The productivity bias hypothesis that explains real exchange rate movements in terms of sectoral productivities rests on two components: firstly, it implies that the relative price of non-traded goods in each country should reflect the relative productivity of labour in the traded and non-traded goods sectors. Secondly, it assumes that purchasing power parity holds for traded goods. The deviation of PPP from the equilibrium exchange rate or the real exchange rate is directly related to the ratio of productivity in a counter country over that of the base country. With inter-country productivity differences believed to be smaller in the service sector than in the sectors producing goods and with the prices of traded goods equalised through arbitrage, the relative prices of non-traded goods (services) would be directly correlated with productivity levels in individual countries. The thesis employs stationarity and cointegration tests in order to determine the presence of long-term, equilibrium, relationship between PPP and productivity variables of the above-mentioned two countries. The overall finding of this thesis is supportive of the productivity bias hypothesis in purchasing power parity concerning the two countries, South Africa and Switzerland. Accordingly, it has been found out that the deviation from equilibrium exchange rate can be explained by differences in productivity. Though currently being challenged by the service sector, South Africa’s manufacturing sector is assuming an important place in the economy. Given the need for improved competitiveness in the manufacturing sector, it is imperative that policy analysis and formulation render increased emphasis on efficiency and costeffectiveness. Such an integrated approach may aid not only in raising productivity but also in managing the intertwined socio-economic challenges of unemployment, poverty and inequality. / Thesis (M.A.)-University of KwaZulu-Natal, Pietermaritzburg, 2005.

Globalisation and financial liberalisation has increased the linkages across countries in recent times. The existence of money market links has important implications for both domestic monetary policy and for investment decisions. This study examines the linkages between South Africa’s money market and selected major international money markets. The objectives of the study are firstly to examine the links between the repo rate of South Africa and the central bank rates of the EU, Japan, UK and US. Secondly, is to compare the influence of domestic and foreign monetary policy decisions on South Africa’s money market. The third objective is to examine the long run relationship between the South African money market and the money markets of its major trading partners. Three estimation techniques are used to examine the different links. Principal components analysis, four tests of cointegration, and stationarity tests of the spreads/risk premium between South Africa’s interest rates and the interest rates of the other countries. All three techniques show that there is no long-run link between South Africa’s central bank rates and the central bank rates of the other countries. This shows that the repo rate does not depend on movements in other central bank rates. Domestic money market interest rates respond strongly to changes in the repo rate whilst showing no dependence on central bank rates of the other countries. This confirms the autonomy of the South African Reserve Bank in carrying out policy objectives. When the risk premium is accounted for under the third technique, evidence of integration is found. This indicates that the risk premium plays a crucial part in the level of integration between South Africa and the countries included in the study.

Monetary policy in South African is the primary means by which the authorities can influence activity in the overall economy. The South African Reserve Bank accommodates banks through repo transactions for which they charge the repo rate. The most important market in the transmission of the repo rate to the rest of the economy is the interbank market. As such, a detailed discussion of this market is given. In September 200 I the monetary authorities made certain adjustments to the repo system of accommodation, which included changing the repo rate from a floating rate to a fixed rate that would be administratively determined by the MPC. This was done to address certain weaknesses in the floating rate system. This thesis examines and compares the period before and after the adjustments to the repo system, with the aim of determining whether or not the monetary authorities achieved the goals intended from making this change. The repo rate, prime interbank rate, 3-month NCO rate and the prime lending rate are analysed using the Engle-Granger two variable approach and an ECM model to test for causality. It was found that the monetary authorities did not achieve their intended goals as the relationship between the repo rate and the interbank rate was more significant in the first period. Furthermore, the direction of causality the authorities hoped to achieve by implementing the changes were in fact already in place. As such the adjustments to the system changed the transmission mechanism from the one desired by the authorities to one that was not intended. The conclusions reached by this study show that, in terms of the objectives of the monetary authorities, the previous repo system functioned better. / KMBT_363 / Adobe Acrobat 9.54 Paper Capture Plug-in

This study assessed the effects of currency volatility on the Johannesburg Stock Exchange. An evaluation of literature on exchange rate volatility and stock markets was conducted resulting into specification of an empirical model.The Generalised Autoregressive Conditional Heteroskedascity (1.1) (GARCH) model was used in establishing the relationship between exchange rate volatility and stock market performance. The study employed monthly South African data for the period 2000 – 2010. The data frequency selected ensured an adequate number of observations. A very weak relationship between currency volatility and the stock market was confirmed. The research finding is supported by previous studies. Prime overdraft rate and total mining production were found to have a negative impact on Market capitalisation. Surprisingly, US interest rates were found to have a positive impact on Market capitalisation. This study recommended that, since the South African stock market is not really exposed to the negative effects of currency volatility, government can use exchange rate as a policy tool to attract foreign portfolio investment. The weak relationship between currency volatility and the stock market suggests that the JSE can be marketed as a safe market for foreign investors. However, investors, bankers and portfolio managers still need to be vigilant in regard to the spillovers from the foreign exchange rate into the stock market. Although there is a weak relationship between rand volatility and the stock market in South Africa, this does not necessarily mean that investors and portfolio managers need not monitor the developments between these two variables.

Thesis (M. Commerce (Economics)) -- University of Limpopo, 2016 / The purpose of this paper is to ascertain the impact of the real effective exchange rate on South Africa‟s trade balance and whether the J-curve phenomenon and the Marshal-Lerner condition are satisfied in the economy. Using data spanning the period 1980Q1 – 2014Q4, the Autoregressive Distributed Lag (ARDL) bounds test as well as the Johansen cointegration test were employed to test for the long run cointegrating relationship between the variables. The ARDL approach was employed to estimate both the long run and short run models as well as to ascertain whether the Marshal – Learner condition as well as the J-curve phenomenon are satisfied in the RSA economy. The results from the cointegration tests show that there is a stable long run equilibrium relationship between the trade balance, real effective exchange rate, domestic GDP, money supply, terms of trade and foreign reserves. The results from the Autoregressive Distributed Lag long run model show that a depreciation of the ZAR improves the trade balance, thus confirming the MarshalLerner condition. The results further reveal that domestic GDP and money supply both have a significant negative impact on the trade balance in the long run with the terms of trade reported positive as well. Foreign reserves were not found to significantly affect the trade balance in the long run. In the short run, the ARDL error correction model shows that a ZAR depreciation leads to a deterioration of the trade balance, thus confirming the J-curve effect for the RSA economy. The terms of trade effect was reported positive in the short run, thus confirming the Harberger-LaursenMetzler effect (HLME) in the process. Money supply, domestic GDP and foreign reserves are also found to have a significant negative impact on the trade balance in the short run. Finally, the error correction model reveals that about 26% of the disequilibrium in the trade balance model is corrected in each quarter.

MCOM / Department of Economics / The choice of a weak or strong currency has been at the center of the debate in most developing economies as exchange rates play a vital role in a country’s level of economic growth. This growth is critical to many developing economies. The study assessed the role of real exchange rate on economic growth in South Africa from 1994, first quarter, to 2015, fourth quarter. The study used time-series data in which Augmented Dicky Fuller and Philip Perron tests for stationarity, cointegration test, Vector Error Correction Model (VECM) approach for the long-run relationship were conducted. Impulse Response Function (IRF) and Variance Decomposition (VD) were also conducted to explain the response to shock amongst variables and how much of the forecasting error variance is explained by the exogenous shocks to other variables. VECM results showed a positive role exchange rates play on economic growth in South Africa. The study’s implication is that currency devaluation (exchange rates depreciation) can be effective in improving economic growth in the short-run. Nonetheless, a strong currency is good for economic growth in the long-run as it attracts foreign investments and a good instrument for controlling inflation. Thus, basing on the findings of the study, the floating exchange rate system adopted by South Africa in 2000 can be maintained.

Thesis (M. Com.(Economics)) -- University of Limpopo, 2017 / The relationship between unemployment, exchange rate and inflation has been a subject of debate for many years. Given the fact that South Africa is faced with a very low economic growth rate, inflation rate which is likely to go beyond the upper band of 6 percent and a high level of unemployment, policy makers are often faced with the trade-off between unemployment and inflation rate in the country. The purpose of this study is to determine the relationship between exchange rate, unemployment and inflation in South Africa. The study employed Johansen cointegration procedures and the vector error correction model (VECM) to capture the relationship between the variables. The Engle-Granger causality test was also employed to analyse causality amongst the variables. The results of Johansen cointegration test indicate that there is a long-run equilibrium relationship between the variables. The VECM also confirmed the existence of short-run equilibrium relationship between the variables. The nature of the relationship indicates that there is a significant negative relationship between unemployment and inflation in South Africa. This implies that policy makers are been faced with the trade-off between these two variables. The results further indicate that inflation is positively related to exchange rate, meaning a depreciation of the Rand (South African currency) in the foreign exchange market will feed to inflation in the home country. Furthermore, it is also indicated that unemployment is positively related to exchange rate. Meaning, a depreciation of the Rand in the foreign exchange market increases the level of unemployment in South Africa. All the results appeared to be significant. Policies aimed at lowering unemployment and inflation rate are recommended. It is also recommended that policy makers in South Africa take measures to improve the quality of education, skills training and steps to increase the labour intensity of production.

This study focuses on foreign direct investment ("FDI") and its importance to the economy of South Africa. Recognising that FDI, notwithstanding the type, can contribute to economic growth and development, most countries including South Africa are constantly working to attract it, and hence its demand has become highly competitive. However, FDI does not go without some negative effects, such as conflicts between host and investor country, and the creation of damaging competition to local firms. These negative effects could be minimised if policies and strategies for the promotion and attraction of FDI is part of, and integrated into, general economic development and economic reform policies, and not seen in isolation. Although South Africa has implemented strategies to attract more FDI, a refinement of some of these policies is needed if the country is to be successful in this regard. / Economics / M. Comm. (Economics)

The main objective of the study was to determine the exchange rate volatility regime for carry trade profitability when using the South African Rand as the target currency. The study used the Logistic Smooth Transition Regression (LSTR) model to test the uncovered interest rate parity (UIP). The Sharpe ratio and the risk adjusted forward premium were used as the transition variables. The transition variable is a function of the transition function, which is used to determine the regime for the UIP. The LSTR model is characterised by three regimes, i.e. the lower regime, the middle regime and the upper regime. The LSTR model was tested for the short-term forward rate maturity of less than one year. The results show that the UIP hypothesis holds in the middle regime for the Rand/USD and the Rand/GBP when using the Sharpe ratio as the transition variable. Meanwhile, the UIP hypothesis does not hold for the Rand/Yen when using the Sharpe ratio as the transition variable for the forward rate maturity of one month, and it does hold for other short-term forward rate maturity of less than one year. The results for the risk adjusted forward premium as the transition variable show that the UIP hypothesis does not hold for all three currencies at various short-term forward rate maturities of less than one year. The research provides the following contributions to new knowledge: (1) Uncovered interest parity hypothesis holds in the middle regime for all periods for the Rand/USD and the Rand/GBP when using the Sharpe ratio as the transition variable with a short-term forward rate maturity of less than one year. (2) Currency carry trade profit taking for the Rand/USD and the Rand/GBP can be achieved in the upper regime. (3) The results for the Rand/Yen are mixed, in that the UIP hypothesis does not hold for other crisis periods as a result of negative Sharpe ratios. However, for the calm periods, UIP hypothesis holds in the middle regime for the Rand/Yen for short-term forward rate maturity of more than one month but less than one year when using the Sharpe ratio as the transition variable. The overall contribution of this study is that for the South African Rand as the target currency, the UIP hypothesis holds for the short-term horizon when using the Sharpe ratio as the transition variable and that this mostly depends more on currency than on horizon. Contrary to other researchers who found that the UIP holds in the long-term maturity with higher Sharpe ratios in the upper regime, this study proved that the UIP holds in the short-term maturity horizon. / Business Management / D.B.L.

This study investigated the determinants of inflation in South Africa using quarterly data from 1970Q1 to 2015Q4. The study was motivated by recent trends in domestic inflation that has frequently been at the upper end of the target range of between 3% and 6% and the need to guide inflation related policy since 2008. These recent trends raised concerns regarding the effectiveness of the current monetary policy approach in responding to internal and external factors that are significant in determining domestic inflation. Using Error Correction Model (ECM) modelling techniques, empirical results revealed that inflation expectations, labour costs, government expenditure and import prices are positive determinants, while GDP and exchange rates are negative determinants of inflation. To achieve the macroeconomic policy objective of a stable and low inflation rate for South Africa, more emphasis should be placed on anchoring inflation expectations, which was found to be highly significant in determining inflation. / Economics / M. Com. (Economics)