Includes bibliographical references / This thesis focuses on the effects and causes of exchange rate volatility in South Africa. These issues are analysed in three stand-alone but related papers. The first paper (Chapter 2) investigates the impact of real exchange rate volatility on employment growth in the manufacturing sector. The study contributes to the literature on the employment effects of exchange rate volatility in emerging markets given limited studies. This is done by using the Autoregressive Distributed Lag (ARDL) counteraction approach which is able to estimate an error correction form of the model for the variables under investigation. This enables one to analyse the relationship between exchange rate volatility and employment growth. The advantage of this approach is that it performs better in small samples and works well even when the underlying variables are integrated of different orders. Employing quarterly time series data for the period 1995 . 2010, the analysis shows that real exchange rate volatility has a significant contractionary effect on manufacturing employment growth. The study also provides evidence that exchange rate level, output, wages and interest rates have significant effects on manufacturing employment growth. The results suggest that the government can reduce the adverse effects of exchange rate volatility on manufacturing by adopting macroeconomic policies that minimise exchange rate volatility and policies that promote employment creation, for instance, less restrictive policies given that the results show that an increase in interest rates leads to a decline in employment. Coming up with macroeconomic policies that minimise exchange rate volatility requires the knowledge of the causes of exchange rate volatility. As a result, the second paper (Chapter 3) investigates the determinants of exchange rate volatility in South Africa. Few studies investigate the determinants of rand volatility (Arezki, Dumitrescu, Freytag & Quintyn 2014, Farrell 2001). This study contributes to the literature by finding the sources of rand volatility using output volatility, money supply volatility, foreign reverses volatility, commodity price volatility, openness and a dummy for capital account liberalisation as explanatory variables. This is done using GARCH models for the period 1986- 2013 employing monthly time series data. The advantage of GARCH models is that they are able to model and forecast time-varying variance given that the exchange rate behaves similarly to other asset prices, for example, stock prices. The study tests the hypothesis that economic openness leads to a reduction in exchange rate volatility following Hau's (2002) modifications of the New Open Macroeconomics model of Obstfeld & Rogoff (1995, 1996). South Africa is a good case study following the liberalisation of the capital account in March 1995. The results show that switching to a coating exchange rate regime has a significant positive effect on exchange rate volatility. That is, it increases exchange rate volatility. The results also show that trade openness reduces exchange rate volatility using the bilateral exchange rate. The results also show that output, commodity prices, money supply and foreign reserves volatilities significantly influences exchange rate volatility. The study also shows that real factors (commodity prices, output and openness) have relatively larger effects on exchange rate volatility compared to monetary factors. The third paper (Chapter 4) analyses the short run behaviour of the South African rand using daily data. The study contributes to the literature on the causes of exchange rate movements in several ways. First, it uses an event studies approach a la Campbell, Lo & MacKinlay (1997) to answer two research questions. First, what is the impact of South Africa's monetary policy announcements on the rand? Second, what is the impact of South African political events on the rand? The advantage of event studies is that they are able to quantify systematically the abnormal or unexpected impact of an economic or political event on asset prices like the exchange rate. Second, the study focuses on an emerging market given that most studies have mainly focused on developed economies. Third, few studies that use event studies in South Africa focus on stock market reaction to announcements. The results find 8 out of 12 significant cumulative abnormal returns for monetary policy announcements. This suggests that the rand is not only influenced by demand and supply flows but also by news. The study also finds significant cumulative abnormal returns for all the three exchange rates following the Marikana massacre on 16 August 2012 and the release of Nelson Mandela banknotes on 6 November 2012. The ANC elective conference only has significant cumulative abnormal returns using the Rand/US dollar in 2007 and 2012.
| Identifer | oai:union.ndltd.org:netd.ac.za/oai:union.ndltd.org:uct/oai:localhost:11427/16599 |
| Date | January 2015 |
| Creators | Mpofu, Trust Reason |
| Contributors | Bhorat, Haroon, Peters, Amos C |
| Publisher | University of Cape Town, Faculty of Commerce, School of Economics |
| Source Sets | South African National ETD Portal |
| Language | English |
| Detected Language | English |
| Type | Doctoral Thesis, Doctoral, PhD |
| Format | application/pdf |
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