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Comparison study of methodologies for estimating the long-run exchange rate pass-through to import prices for South Africa

Abstract
The resilience of trade balances of the major industrialised economies such as the US and
Japan to changes in their exchange rates following the switch from fixed to floating exchange
rate regimes, triggered interest in the exchange rate pass-through relationship. Because of the
importance of the pass-through issue particularly in economic policy formulation, a sizeable
literature has developed over recent years. Comprehensive surveys of this literature include
Menon (1995), Goldberg and Knetter (1997) and McCarthy (2002). However, not much
attention has been paid to the comparison of the methodologies for estimating exchange
rate pass-through. This research report aims to address this imbalance by comparing some
of the exchange rate pass-through estimation methodologies via a Monte Carlo simulation
study, based on the South African data set. The econometric results reported in this research
report suggest that the Johansen type VECMs are superior to polynomial distributed lag
models, exchange rate pass-through to South Africa’s import prices is incomplete (around
78%) and that the speed of adjustment to long-run equilibrium is low, about 7 per cent of
disequilibrium in the previous month is corrected in the current month. We conclude that
if we are not sure about the unit root properties of the data (as is normally the case), then
the ARDL precedure is the appropriate model for empirical work.

Identiferoai:union.ndltd.org:netd.ac.za/oai:union.ndltd.org:wits/oai:wiredspace.wits.ac.za:10539/6009
Date06 February 2009
CreatorsHove, Herbert
Source SetsSouth African National ETD Portal
LanguageEnglish
Detected LanguageEnglish
TypeThesis
Formatapplication/pdf

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