BazEkon - The Main Library of the Cracow University of Economics

BazEkon home page

Main menu

de Bruyn Riané (University of Pretoria, South Africa), Gupta Rangan (University of Pretoria, South Africa), Stander Lardo (University of Pretoria, South Africa)
Testing the Monetary Model for Exchange Rate Determination in South Africa : Evidence from 101 Years of Data
Contemporary Economics, 2013, vol. 7, nr 1, s. 19-32, rys., tab., bibliogr. 54 poz.
Kurs walutowy, Prognozowanie, Prognozowanie kursów walut
Exchange rates, Forecasting, Exchange rates forecasting
Afryka Południowa
South Africa
Evidence in favor of the monetary model of exchange rate determination for the South African Rand is, at best, mixed. A co-integrating relationship between the nominal exchange rate and monetary fundamentals forms the basis of the monetary model. With the econometric literature suggesting that the span of the data, not the frequency, determines the power of the co-integration tests and the studies on South Africa primarily using short-span data from the post-Bretton Woods era, we decided to test the long-run monetary model of exchange rate determination for the South African Rand relative to the US Dollar using annual data from 1910 - 2010. The results provide some support for the monetary model in that long-run co-integration is found between the nominal exchange rate and the output and money supply deviations. However, the theoretical restrictions required by the monetary model are rejected. A vector error-correction model identifies both the nominal exchange rate and the monetary fundamentals as the channel for the adjustment process of deviations from the long-run equilibrium exchange rate. A subsequent comparison of nominal exchange rate forecasts based on the monetary model with those of the random walk model suggests that the forecasting performance of the monetary model is superior. (original abstract)
Full text
  1. Ahking, F. W., & Miller, S. M. (2004). A Comparison of the Stochastic Processes of Structural Time-Series Exchange Rate Models, In A. Zellner & F. C. Palm (Eds.). The structural econometric time-series analysis approach (pp. 405-418). Cambridge, UK: Cambridge University Press
  2. . Andrews, D. W. K. (1991). Heteroskedasticity and autocorrelation consistent covariance matrix estimation. Econometrica, 59(3), 817-854.
  3. Andrews, D. W. K., & Monahan, J. C. (1992). An improved heteroskedasticity and autocorrelation consistent covariance matrix estimator. Econometrica, 60(4), 953-966.
  4. Andrews, D. W. K. (1993). Tests for parameter instability and structural change with unknown change point. Econometrica, 61(4), 821-856.
  5. Andrews, D. W. K., & Ploberger, W. (1994). Optimal tests when a nuisance parameter is present only under the alternative. Econometrica, 62(6), 1383-1414.
  6. Aron, J., Elbadawi, I., & Kahn, B. (1997). Determinants of the real exchange rate in South Africa (Working Paper Series No. 97-16). Centre for the Study of African Economies, University of Oxford, London.
  7. Brink, S., & Koekemoer, R. (2000). The economics of exchange rates: a South African model. The South African Journal of Economic and Management Sciences, 3(1), 19-51.
  8. Casteleijn, A. J. H. (1999, June). The viability of implementing an inflation targeting monetary policy framework in South Africa. South African Reserve Bank Quarterly Bulletin, 63-73.
  9. Chinn, M. D. (1999). A monetary model of the South African Rand. The African Finance Journal, 1(1), 69-91.
  10. Chinn, M. D., & Meredith, G. (2005). Testing the uncovered interest parity at short and long horizons during the post-Bretton Woods era (Working Paper No. 11077). National Bureau of Economics Research.
  11. Clark, T. E., & McCracken, M. W. (2001). Tests of equal forecast accuracy and encompassing for nested models. Journal of Econometrics, 105(1), 85-110.
  12. Dickey, D. A., & Fuller, W. A. (1979). Distribution of the estimators for autoregressive time series with a unit root. Journal of the American Statistical Association, 74(366), 427-431.
  13. Diebold, F. X., & Mariano, R. S. (1995). Comparing predictive accuracy. Journal of Economics and Business Statistics, 13(3), 253-263.
  14. Dube, S. (2008). Stock prices and the exchange rate in a monetary model: an ARDL bounds testing approach using South African data. The African Finance Journal, 10(1), 1-27.
  15. Ericsson, N. R. (1992). Cointegration, exogeneity and policy analysis: an overview. Journal of Policy Modeling, 14(3), 251-280.
  16. Hakkio, C. S., & Rush, M. (1991). Co-integration: how short is the long run? Journal of International Money and Finance, 10(4), 571-581.
  17. Hansen, B. E. (1992). Tests for parameter instability in regressions with (1)I processes. Journal of Business and Economic Statistics, 10(3), 321-335.
  18. Harvey, D. I., Leybourne, S. J., & Newbold, P. (1998). Tests for forecast encompassing. Journal of Business and Economic Statistics, 16(2), 254-259.
  19. Hassan, S., & Simione, F. (2011). Exchange rate determination under monetary policy rules in a financially underdeveloped economy: a simple model and application to Mozambique. Journal of International Development, forthcoming. New York: Wiley. (ERSA Working Paper 192.)
  20. Horvath, M. T., & Watson, M. W. (1995). Testing for cointegration when some of the cointegrating vectors are prespecified. Econometric Theory, 11(05), 984-1014.
  21. Johansen, S. (1988). Statistical analysis of cointegrating vectors. Journal of Economic Dynamics and Control, 12(2-3), 231-254.
  22. Johansen, S. (1991). Estimation and hypothesis testing of cointegration vectors in Gaussian vector autoregressive models. Econometrica, 59(6), 1551-1580.
  23. Jonsson, G. (1999). Inflation, money demand and purchasing power parity in South Africa (Working paper No. 99/122). International Monetary Fund.
  24. Kryshko, M. (2006). Nominal exchange rates and uncovered interest parity: non-parametric co-integration analysis (Unpublished article). Department of Economics, University of Pennsylvania.
  25. Lacerda, M., Fedderke, J. W. & Haines, L. M. (2010). Testing for purchasing power parity and uncovered interest parity in the presence of monetary and exchange rate regime shifts. The South African Journal of Economics, 78(4), 363-382
  26. Ludi, K. L., & Ground, M. (2006). Investigating the bank-lending channel in South Africa: a VAR approach (Working Paper No. 2006-04). Department of Economics, University of Pretoria.
  27. Mark, N.C. (1995). Exchange rates and fundamentals: evidence on long-horizon predictability. American Economic Review, 85(1), 201-218.
  28. Mark, N. C. & Sul, D. (2001). Nominal exchange rates and monetary fundamentals: evidence from a small post-Bretton Woods panel. Journal of International Economics, 53(1), 29-52.
  29. Meese, R. A., & Rogoff, K. (1983). Empirical exchange rate models of the seventies: do they fit out of sample? Journal of International Economics, 14(1-2), 3-24.
  30. Mokoena, T. M. (2007). Taking the puzzle out of the purchasing power parity puzzle: an application in respect of South Africa. The South African Journal of Economics, 75(1), 22-34.
  31. Mokoena, T. M., Gupta, R., & van Eyden, R. (2009a). Testing for fractional integration in SADC real exchange rates. The South African Journal of Economics, 77(4), 531-537.
  32. Mokoena, T. M., Gupta, R., & van Eyden, R. (2009b). Testing for PPP using SADC real exchange rates. The South African Journal of Economics, 77(3), 351-362.
  33. Mokoena, T. M., Gupta, R., & van Eyden, R. (2009c). Half-life deviations from PPP in the SADC. Applied Econometrics and International Development, 9(1), 141-148.
  34. Moll, P. G. (1999). Money, interest rates, income and inflation in South Africa. The South African Journal of Economics, 67(1), 34-64.
  35. Moll, P. G. (2000). The demand for money in South Africa: parameter stability and predictive capacity. The South African Journal of Economics, 68(2), 190-211.
  36. Nell, K. S. (2003). The stability of M3 money demand and monetary growth targets: the case of South Africa. Journal of Development Studies, 39(3), 155-180.
  37. Ng, S., & Perron, P. (2001). Lag length selection and the construction of unit root tests with good size and power. Econometrica, 69(6), 1519-1554.
  38. Otero, J., & Smith, J. (2000). Testing for co-integration: power versus frequency of observation - further Monte-Carlo results. Economics Letters, 67(1), 5-9.
  39. Phillips, P. C. B. (1994). Some exact distribution theory for maximum likelihood estimators for cointegrating coefficients in error correction models. Econometrica, 62(1), 73-93.
  40. Phillips, P. C. B., & Hansen, B. E. (1990). Statistical inference in instrumental variables regression with (1)I processes. Review of Economic Studies, 57(1), 99-125.
  41. Phillips, P. C. B., & Ouliaris, S. (1990). Asymptotic properties of residual based tests for cointegration. Econometrica, 58(1), 165-193.
  42. Phillips, P. C. B., & Perron, P. (1988). Testing for a unit root in time series regression. Biometrika, 75(2), 335-346.
  43. Rapach, D. E., & Wohar, M. E. (2002). Testing the monetary model of exchange rate determination: new evidence from a century of data. Journal of International Economics, 58(2), 359-385.
  44. Rapach, D. E., & Wohar, M. E. (2004). Testing the monetary model of exchange rate determination: a closer look at panels. Journal of International Money and Finance, 23(6), 867-895.
  45. Saikkonen, P. (1991). Asymptotically efficient estimation of cointegrating regressions. Econometric Theory, 7(1), 1-21.
  46. Shiller, R. J. & Perron, P. (1985). Testing the random walk hypothesis: Power versus frequency of observation. Economics Letters 18(4), 381-386.
  47. Shin, Y. (1994). A residual-based test of the null of cointegration against the alternative of no cointegration. Econometric Theory, 10(1), 91-115.
  48. Sichei, M. M., Gebreselasie, T. G., & Akanbi, O. A. (2005). An econometric model of the Rand-US Dollar nominal exchange rate. (Working Paper No. 2005-14). Department of Economics, University of Pretoria. Retrieved from$File/OccPaper9.pdf
  49. Sims, C.A. (1980). Macroeconomics and reality. Econometrica 48(1), 1-48.
  50. Stock, J. H. & Watson, M. W. (1993). A simple estimator of co-integrating vectors in higher order integrated systems. Econometrica 61(4), 783-820.
  51. Van der Merwe, E. J. (1997). Exchange rate management policies in South Africa: recent experience and prospects (Occasional Paper No. 9). The South African Reserve Bank.
  52. Walsh, C.E. (2003). Monetary Theory and Policy. Cambridge, MA: MIT Press.
  53. West, K. D. (1996). Asymptotic inference about predictive ability. Econometrica, 64(5), 1067-1084.
  54. Ziramba, E. (2007). Measuring exchange market pressure in South Africa: an application of the Girton-Roper monetary model. The South African Journal of Economic and Management Sciences, 10(1), 89-98.
Cited by
Share on Facebook Share on Twitter Share on Google+ Share on Pinterest Share on LinkedIn Wyślij znajomemu