An empirical analysis of exchange rate volatility on exports : the case of South Africa

Abstract

This study assesses the impact of exchange rate volatility on energy prices in South Africa. The study employed quarterly data from 1985Q1 to 2020Q4. Volatility in the study is measured using Generalized Autoregressive Conditional Heteroscedasticity (GARCH) and standard deviation. The estimation techniques utilised in the study includes Johansen Cointegration and the Vector Error Correction Model (VECM). The results indicates that there is high presence of exchange rate volatility in South Africa. There is a positive and significant long run relationship between energy prices (natural gas and crude oil prices), and trade openness, real exchange rate volatility, and money supply. While inflation rate and interest differentials have a negative and significant relationship with energy prices in South Africa. The study propose that the government and central bank should intervene to manage the exchange rate properly and design policies that are suitable for the reduction of deviations in the exchange rate. To stabilise the energy prices, the Central Bank should hike the interest rates as this will reduce the consumers and companies to borrow and spend money that will drive the demand for oil. Lastly, the government and the Central Bank should narrow the inflation rate.