Abstract:
This paper analyzes the extent to which the South African Reserve Bank (SARB) uses the repo rate in response to
exchange rate depreciations. We use a vector autoregression to model the simultaneous linkage between the real effective
exchange rate and the policy rate. A combination of short-run and sign restrictions are used to identify the model.
The authors’ results show that currency depreciation is important in monetary policy interest rate setting. The exchange
rate also reacts significantly to changes in the repo rate.
