The neoclassical theory suggests that free flows of external capital should be equilibrating and thereby facilitating smoothening of an economy's consumption or production patterns. South Africa has a very low savings rate, making it highly dependent on capital inflows which create instability and volatility in global markets. A policy dilemma is undoubtedly evident: capital inflows help to cater for the domestic low savings and at the same time the inflows pose instability, a threat on competitiveness and volatility challenges to the same economy due to their impact on exchange rates. The question is: are all forms of capital flows equally destabilizing? Since studies based on South Africa considered only the relationship between aggregate capital flows and real exchange rate, modelling individual components of capital flows could enlighten policy formulation even further. The composition of the flows and their effects on the composition of aggregate demand determine the evolution of real exchange rate response to surges in capital flows. Through co-integration and vector error correction modelling techniques applied to South African data between 1990 and 2010, the study found out that foreign portfolio investment exerts the greatest appreciation effect on the South African real exchange rate, followed by other investment and finally foreign direct investment. Thus the impact of capital flows on real exchange rate in South Africa differs by type of capital. This presents varied policy implications.
| Identifer | oai:union.ndltd.org:netd.ac.za/oai:union.ndltd.org:ufh/vital:11466 |
| Date | January 2012 |
| Creators | Mishi, Syden |
| Publisher | University of Fort Hare, Faculty of Management & Commerce |
| Source Sets | South African National ETD Portal |
| Language | English |
| Detected Language | English |
| Type | Thesis, Masters, M Com |
| Format | 129 leaves; 30 cm, pdf |
| Rights | University of Fort Hare |
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