Essays on South Africa: Exchange Rates, Bilateral Trade and Inflation

Abstract

South Africa shows how natural resources can be harnessed to build a successful economy. This success gives rise to peculiar macroeconomic issues that warrant analysis. Chapter one of this dissertation investigates the effects of exchange rate volatility on South Africa’s export of metals, using monthly data for the period 1980:01 to 2011:07. The study uses squared residuals from the Generalized Autoregressive Conditional Heteroskedasticity (GARCH) process to generate a measure of exchange rate volatility, which is then tested in a model of South Africa’s metal exports. Utilizing conventional cointergration techniques, the study estimates both the short-run and long-run impacts of exchange-rate volatility (and other macro-variables) on South Africa’s export volumes of 11 major metals. Results suggest that exchange rate volatility increases export demand for South Africa’s base metals both in the short-run and in the long-run. Chapter two proceeds with an examination of relationships between South Africa’s bilateral trade volumes with 42 of its major trading partners. Annual data for the period 1970 to 2010 is used in the context of a gravity equation. The select variables represent importer/exporter’s real income, population, export prices, unemployment, real effective exchange rate, exchange rate volatility, and a set of dummy variables representing involvement in a Preferential Trade Area (PTA) and a dummy variable signifying a change in South Africa’s international trade pattern. Results show that real foreign sector has a significant impact on South Africa’s bilateral trade. Exchange rate volatility yields mixed results for import demand and depresses trade for exports. PTAs are found to be building blocks to trade, while income inequality within a PTA results to trade diversion. Finally, inclusion of the gravity equation’s intangible attributes such as language, colonial ties, and culture is justified. Lastly, the causes of rising demand pull inflation in South Africa are examined with an eye on the international price of gold given the importance of gold mining in the country. Effects of the money supply, exchange rate, foreign income, and an index of political stability are included in the model. Results show that money supply, exchange rates, and the price of gold and world income to be the major determining factors of inflation levels. The evolving monetary regime and political stability are also found to positively influence inflation levels.