EXCHANGE RATE DYNAMICS IN SOUTH AFRICA: A REVIEW OF PAST AND PRESENT REGIMES
EXCHANGE RATE DYNAMICS IN SOUTH AFRICA: A REVIEW OF PAST AND PRESENT REGIMES

Summary/Abstract: In this paper, we evaluate the exchange rate episodes in South Africa during the period 1920–2012. We examine the various exchange rate reforms and exchange rate regimes that have been implemented in the country – over the years, and in a chronological order. We find that, like many other emerging economies,South Africa has experienced fundamental exchange rate fluctuations during thestudied period. In particular, the period 2002–2013 witnessed persistent fluctuations,which seem to have been propelled largely by market shocks – rather than by marketfundamentals. In addition, the massive foreign capital inflows that the economyattracted during the high interest rate period caused the rand to trade at a rate over and above its equilibrium level. This high interest rate policy, especially during the period 2000–2009, was necessary – in order to bring the country’s inflation rate downto its 3%–6% target range – in accordance with the country’s inflation-targeting framework. This, coupled with the fact that the rand is currently one of the most tradeable currencies in the world, rendered the currency more volatile than would otherwise have been expected. It is, therefore, recommended that some marketfriendly foreign exchange restraints be maintained alongside the flexible exchange rate policy, in order to ensure that the stability of the rand is safeguarded, as far as possible.

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