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On the Rand:
A Note on the South African
Exchange Rate
Professor Jeffrey Frankel
Kennedy School of Government, Harvard University
Thanks are due the able research assistance of Melesse Tashu.
This work is part of the contribution of the Macroeconomics Group
within the Harvard University Center for International Development’s
Project on South Africa: Performance and Prospects
What explains the large rand
movements in recent years?
• Is the rand a commodity currency, like the Australian and
Canadian dollars? That is, is it a currency that
appreciates when prices of the mineral products that it
produces are strong on world markets?
• Does the rand behave like major currencies
– in light of its developed financial markets?
– This does not necessarily mean fitting standard theories closely,
as those theories don’t work well in practice for major
industrialized currencies either.
– But such variables as GDP and inflation should have effects.
• Has there been an element of momentum or bandwagon
to some recent movements?
General equation is:
Log Rand value =
α + β 1 Log Real P Minerals
+ β 2 Log (SA GDP/foreign GDP)
+ β 3 ∆Log Rand value
+ β 4 Inflation Differential
+ β 5 Real Interest Differential
+ β6 Country Risk Premium
+ β7 trend + u
We try various versions of this equation:
with value of rand defined in nominal terms, or
real; bilateral against $, or trade weighted.
•
•
•
•
Real P Minerals is computed as a weighted average of prices of the
specific mineral products that South Africa produces and exports. It
is intended to capture the terms of trade, and so is expressed in real
form by deflating by US price level.
(SA GDP/foreign GDP) captures an important determinant of the
demand for money (domestic relative to foreign)
∆Log Rand Value t-1 is entered experimentally to capture the idea
of bandwagon or momentum elements.
3 variables capture rates of return.
– Inflation Differential (South African minus foreign) should have a
negative effect
– Real interest differential (nominal interest rate on rand government
bonds, minus expected inflation, minus the same for abroad) should
have a positive effect
– A country risk premium is included to control for risk of default; it should
have a negative effect. Computed as corporate rand interest rate
minus govt. (We couldn’t find data on South African borrowing rate in $,
which is what we want.)
Regression estimates
• The results are highly varied.
• But the real commodity price index does appear
generally to have the hypothesized positive sign
• as does real GDP when included.
• Sometimes the lagged rate of change in the
exchange rate shows a positive effect,
suggesting a bandwagon phenomenon.
• The results for the rate of return variables are
somewhat more mixed. Perhaps the lack of
data on the dollar interest rate for South Africa is
the problem
Monthly Results for Nominal Exchange Rate
• Dependent Variable: LOG(NERI)
• Sample: 1979:02 - 2005:11.
• No. of observations: 322 after adj endpoints
Variable
Coefficient Std. Error
log(WMPI) 0.606
0.0519
DNER
I0.379
0.1859
DEFRSA
-0.117
0.0215
GBRDIF
-0.026
0.0034
INFDIFL
-0.001
0.0021
TREND
-0.007
9.69E-05
C
3.818
0.260
t-Statistic.
11.69
2.04
-5.43
-7.75
-0.63
-70.59
14.67
R2 0.977
The fit is surprisingly good,
but for 2002.
7
6
5
0.4
0.2
4
0.0
-0.2
-0.4
-0.6
80
82 84
86 88
Residual
90 92
94 96
Actual
98 00
02
Fitted
04