An estimation of the J-Curve effect between South Africa and the BRIC countries

Abstract

The type of exchange rate regime a country should adopt and ideal level of the currency have has been an ongoing debate amongst academics, politician and trade unionists. The South African economic debate is currently dominated by debates on the appropriate level of the exchange rate of the rand. With the high volatility of the rand and the rapid appreciation of the rand in 2010 there have been calls for various sectors for government to intervene and devalue the rand. The premise is that devaluation will help counter the volatility of the rand and help stimulate South Africa’s export sector thereby resulting in an improvement of the trade balance. The aim of this research was to determine if there is a relationship between South Africa’s exchange rate and the trade balance and to determine if devaluation of the rand would have a positive influence on the trade balance. Furthermore the extent to which the trade balance would follow the J-Curve effect following devaluation was investigated. Using the long term trade balance model and Autoregressive Distributed Lagged (ARDL) model between the analyses was done between South Africa and the BRIC countries. The conclusion reached was that a devaluation of the rand would not necessarily lead to a long term improvement of the trade balance and no evidence of the J-Curve effect was found. Copyright