The impact of exchange rate uncertainty on exports in South Africa

Abstract

This paper examines the impact of real effective exchange rate uncertainty on aggregate exports of South Africa for the period 1986Q4-2013Q2. Using a bivariate framework where the structural vector autoregression is modified to accommodate bivariate GARCH-in-Mean errors, we find that exchange rate uncertainty has a significant and negative effect on exports. Comparing the response of exports to a shock in exchange rate from a model that includes the real effective exchange rate uncertainty with results from a model that restricts the coefficient of the exchange rate uncertainty to zero, we find that the response is more pronounced in the former model. Furthermore, real exports respond asymmetrically to negative and positive shocks to real effective exchange rate shocks of the same size.