A Triptych on the USD-ZAR Exchange Rate Dynamics

Abstract

South Africa's small, open, resource-based economy and volatile exchange rate may not provide satisfactory conditions for purchasing power parity (PPP). The Bry-Boschan procedure, the Markov regime switching analysis and fractional integration were used to investigate PPP in South Africa. The time series is found to be stationary and mean reverting, thus supporting PPP theory. There is a distinct cyclical pattern where peaks and troughs alternate, linking with specific policy regime switches � further supporting the finding of fractional integration analysis, that shocks to the exchange rate do not cause a permanent deviation from the long term path

South Africa's small, open, resource-based economy and volatile exchange rate may not provide satisfactory conditions for purchasing power parity (PPP). The Bry-Boschan procedure, the Markov regime switching analysis and fractional integration were used to investigate PPP in South Africa. The time series is found to be stationary and mean reverting, thus supporting PPP theory. There is a distinct cyclical pattern where peaks and troughs alternate, linking with specific policy regime switches - further supporting the finding of fractional integration analysis, that shocks to the exchange rate do not cause a permanent deviation from the long term path