The Effect of Exchange Rate Volatility on the Volume of South African Exports

1. The Effect of Exchange Rate Volatility on the Volume of South African Exports Presented by Siobhan Redford

2. Disclaimer • The views expressed are those of the authors and do not necessarily represent those of the South African Reserve Bank or Reserve Bank policy. While every precaution is taken to ensure the accuracy of information, the South African Reserve Bank shall not be liable to any person for inaccurate information or opinions contained herein.

3. Introduction • Exports identified as an important economic growth area for developing countries. • Exchange Rate volatility, it has been suggested, has a negative effect on export volumes. • The ASGISA document suggests that this is the case for South Africa.

4. Theoretical Motivation • Motivation for most producers to enter a market is to earn a return on investment. • Most firms do this through profit maximising behaviour. • Profit = F(Total revenue; Total cost of sales) • Total Revenue is dependent on the price of the good sold  exchange rate volatility could lead to uncertainty of this price for exported goods.

5. Theoretical Motivation Cont. • A typical profit function is given by: • Where PQ(x) would have to be split up such that • e is the presiding exchange rate • Q(x) is the number of produced goods available • p* is the foreign price of goods, p is the local price • t(e,v) is the proportion of produced goods sent for export, variable in the level of the exchange rate and the variablility of the exchange rate.

6. Theoretical Literature • Bigman and Leite (1978) • De Grauwe (1988) • Melitz (2003) • Arize et al (2000) • Caballero & Corbo (1989)

7. Evidence from the rest of the world and South Africa • Methodological Arguments • Arize(1997) • Antle (1983) • Modelling Considerations • Hooper and Kohlhagen (1978) • Kenen and Rodrik (1986) • Caballero and Carbo (1989) • Chowdhury (1993) • Kroner and Lastrapes (1993) • Arize et al (2000) • South African Evidence • Todani and Munyama (2005) • Wilcox (2007)

8. Data • Data taken from SARB, REER a construct using SARB weights. • Quarterly Data from 1961Q1 to 2007Q1 • Construction of the exchange rate volatility variable: • Moving average standard deviation • Conditional variance of the exchange rate (GARCH(5;0)) • Stationarity • ADF tests suggest that all variables are I(1) except the volatility variables which do not return any conclusive evidence. • The problem with the volatility variables: • Seem to have a stationary mean (this is what most stationarity tests test for), do not have a stationary variation.

9. HV HV LV LV Variance of exchange rate

10. Two Volatility Measures

11. Model • The model used is: • Aggregate data used due to insufficient availability of disaggregated data. • Estimation of model done using the Johansen cointegration technique. • South African GDP variable dropped due to high levels of interaction with other variables resulting in simultaneity problem.

12. Long-Run Results

13. Short-Run ResultsAbridged Version

14. Persistance Profile, Model 1

15. Persistance Profile, Model 2

16. Conclusion and Policy Recommendations • Exchange rate volatility does affect exports and hence national income. • More specifically exchange rate volatility seems to negatively affect the growth of South African exports. • Policy measures • Stable and predictable monetary and fiscal policy – in effect already in SA • Otherwise, difficult to suggest much more without determining the causes of exchange rate volatility and establishing what is in the control of policy makers.