The Effect of Exchange
Rate Volatility on the
Volume of South
African Exports
Presented by
Siobhan Redford
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.
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.
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.
Theoretical Motivation Cont.

A typical profit function is given by:

  PQ( x)  W ( x)
Where PQ(x) would have to be split up such that
PQ( x)  t (e, v)ep * Q( x)  (1  t (e, v)) pQ( x)




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.
Theoretical Literature





Bigman and Leite (1978)
De Grauwe (1988)
Melitz (2003)
Arize et al (2000)
Caballero & Corbo (1989)
Evidence from the rest of the world
and South Africa

Methodological Arguments



Modelling Considerations







Arize(1997)
Antle (1983)
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)
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(5;0))
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.
Variance of exchange rate
Plot of Residuals and Two Standard Error Bands
0.25
HV
0.20
HV
LV
LV
0.15
0.10
0.05
0.00
-0.05
-0.10
-0.15
-0.20
1961Q3
1965Q2
1969Q1
1972Q4
1976Q3
1980Q2
1984Q1
Quarters
1987Q4
1991Q3
1995Q2
1999Q1
2002Q4
2006Q3
2007Q1
Two Volatility Measures
Volatility Measures
HEV05
GEVMASD2
0.15
0.020
0.015
0.10
0.010
0.05
0.005
0.00
1961Q1
0.000
1964Q4
1968Q3
1972Q2
1976Q1
1979Q4
1983Q3
Quarters
1987Q2
1991Q1
1994Q4
1998Q3
2002Q2
2006Q1
XVOLt   0  1 REERt   2 GDPFt   3VOLt  
Model

The model used is:
XVOLt   0  1 REERt   2 GDPFt   3VOLt  



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.
Long-Run Results
Long Run Results
Variable
LXVOL
LREER
LGDPF
Model 1
1.0000
(NONE)
0.56901
(0.052454)
-1.5451
(0.043589)
LHEV05
Time Period
1962Q3 to 2007Q1
Model 2
1.0000
(NONE)
0.82064
(0.14372)
-1.4855
(0.041715)
0.51276
(0.21836)
1962Q4 to 2007Q1
Figures in brackets are standard errors. Results are reported as vectors, thus the sign in front of each
variable except the export volume variable needs to be changed to establish the nature of the empirical
relationship.
Short-Run Results
Abridged Version
Short Run Results
dLXVOL
Model 1
Model 2
-0.27197*
-0.34117*
dLXVOL1
-0.010027*
LGEVMASD2
0.010936**
LGEVMASD2(-1)
-0.012102*
LGEVMASD2(-2)
179
178
Obs
0.25626
0.22610
R-Bar-Squared
*, ** indicates level of significance of 1% and 5% respectively
SANCT is a dummy variable to indicate the period of sanctions against South Africa
from 1986Q2 to 1992Q4. RUBICON is a dummy to indicate the period of the Rubicon
speech which caused large unexpected movements in the exchange rate in 1985
Persistance Profile, Model 1
Persistence Profile of the effect of
a system-wide shock to CV'(s)
CV1
1.0
0.8
0.6
0.4
0.2
0.0
0
15
30
45
60
75
Horizon
90
105
120
135
150
Persistance Profile, Model 2
Persistence Profile of the effect of
a system-wide shock to CV'(s)
CV1
1.0
0.8
0.6
0.4
0.2
0.0
0
15
30
45
60
75
Horizon
90
105
120
135
150
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.