Estimating Namibia's Equilibrium Real Exchange Rate

Abstract

This paper estimates the equilibrium real exchange rate for Namibia for the post independence period (1998 to 2012) using quarterly data. Increases in the ratio of investment to GDP and resource balance are associated with an appreciation of the real exchange rate. The terms of trade causes the real exchange rate to depreciate, which suggests that the substitution effect was dominant over the income effect. The real exchange rate adjusts to equilibrium rate while the speed of adjustment indicates that it takes about 4.4 quarters or 1.1 years for 50 percent of the deviation from the equilibrium to be corrected. There were periods of undervaluation and overvaluation of the real exchange, which means that the real exchange rate experienced misalignment.