Exchange rate dynamics in South Africa

ABSTRACT

The structure of the nominal exchange rates in South Africa is examined by using fractional integration. We investigate the levels and the volatilities against the US dollar, the British pound, the Euro, the Japanese yen, the Chinese yuan, the Australian dollar, and the Botswanan pula. The results indicate that most series are unit root, I(1) and though there is some evidence of mean reversion, the orders of integration are close to 1, implying high levels of persistence. However, there is evidence of mean reversion for Bostwana Pula in various subsamples. For the volatilities, the stationary long memory is observed in all cases.

KEYWORDS:

• Exchange rate dynamics
• long memory
• persistence
• South Africa

JEL CLASSIFICATION:

• C1
• C15
• C22
• C53
• C75

Acknowledgements

Luis A. Gil-Alana gratefully acknowledges the financial support from the Ministerio de Ciencia y Tecnología (ECO2017-85503-R). The same author and Gloria Claudio also acknowledged financial support from an internal project from the Universidad Francisco de Vitoria. Comments from the Editor and an anonymous reviewer are gratefully acknowledged.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ Note that under the unit root null hypothesis (i.e. d = 1), the time trend disappears in (2) with t > 1.

² Given the nonstationary nature of the series under the study, the analysis was conducted in first differenced data, adding then the value of 1 to the estimated value of d.

³ These values are those usually employed in most empirical applications.

⁴ Hamming (1973) and Smyth (1998) contain a detailed description of these polynomials.

⁵ Imposing m > 3 in (3) resulted in insignificant coefficients, and using alternative models for the non-linear deterministic terms like the Flexible Fourier Function (FFF) approach of Gil-Alana and Yaya (2018), it also produced insignificant coefficients in all cases.

⁶ Using Shimotsu and Phillips (2006) and Abadir, Distaso, and Giraitis (2007) produced essentially the same results.

Additional information

Funding

This work was supported by the Ministerio de Ciencia y Tecnología [ECO2017-85503-R].