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

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

• Presented by
• Siobhan Redford

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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.

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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.

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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.

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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.

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Theoretical Literature

• Bigman and Leite (1978)
• De Grauwe (1988)
• Melitz (2003)
• Arize et al (2000)
• Caballero Corbo (1989)

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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)

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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(50))
• 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.

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Variance of exchange rate
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Two Volatility Measures
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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.

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Long-Run Results
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Short-Run ResultsAbridged Version
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Persistance Profile, Model 1
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Persistance Profile, Model 2
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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.