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2017 | Book

Introduction Read chapter Read first chapter

Global Economic Uncertainties and Exchange Rate Shocks

Transmission Channels to the South African Economy

Authors: Dr. Eliphas Ndou, Nombulelo Gumata, Prof. Mthuli Ncube

Publisher: Springer International Publishing

Part of: Springer Professional "Wirtschaft+Technik" , Springer Professional "Wirtschaft"

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About this book

This book examines the macroeconomic and regulatory impact of domestic and international shocks on the South African economy resulting from the 2009 financial crisis. It also assesses the impact of the US economy’s eventual recovery from the crisis and the prospect of higher US interest rates in future.

Told in three parts, the book explores associations between economic growth, policy uncertainty and the key domestic and international transmission channels, and transmission effects, of global financial regulatory and domestic macro-economic uncertainties on subdued and volatile economic recovery, financial channels, lending rate margins, and credit growth. The book concludes by extending its focus to the role of US monetary policy, capital flows and rand/US dollar volatility on the South African economy.

Table of Contents

Frontmatter
Chapter 1. Introduction
Abstract
This book offers insights into the direct and indirect transmission channels of elevated foreign and domestic policy and GDP growth uncertainty. Evidence shows that elevated foreign and domestic macroeconomic and policy uncertainties impact real economic activity directly and indirectly that accentuates the effects of uncertainty shocks by acting as a propagation channel. In addition, the uncertainty shock effects are amplified by prevailing foreign and domestic GDP growth uncertainties. Hence, foreign and domestic uncertainties matter. Furthermore, various aspects of the exchange rate volatility explored in the book indicate that transitory volatility dies off fast as opposed to the permanent volatility component, where shocks tend to persist and are associated with level shifts. At the same time, the analysis of net asset purchases by non-residents shows that they are transitory in nature and decay very quickly, in particular bond flows. These findings have serious policy implications for the design of policies aimed at controlling capital flows, reducing financial market distortions and the associated exchange rate movements. At the same time, evidence in the book shows that there are asymmetric exchange rate volatility effects on exports during appreciations and depreciations. Exporters are sensitive to appreciations compared to depreciations, and the exchange rate risk reduces the impact of the exchange rate depreciation on exports growth. In addition, we establish that South African exporting firms practise the pricing to market (PTM) strategy or behaviour. The PTM strategy limits the pass-through of exchange rate changes to foreign currency prices of exports by adjusting profit margins either when the currency appreciates or depreciates. Exporters practise the PTM strategy to stabilise the effects of the exchange rate fluctuations on the foreign currency of their exports. This is especially the case when the exchange rate appreciates relative to when it depreciates. The policy implication is that the exchange rate risk effects seem to be larger when the exchange rate appreciates. This implies that the stimulating abilities of a weaker currency may fail to spur exports growth contrary to expectations as the tendency of exporters to counter the effect of the exchange rate fluctuations renders policies designed to push the exchange rate in a particular direction ineffective. These effects of the PTM strategies may also differ depending on whether the particular sector is more responsive to the exchange rate fluctuations.
Eliphas Ndou, Nombulelo Gumata, Mthuli Ncube

The Role of Economic Growth, Economic Policy Uncertainty and the Channels of Transmission into the Domestic Economy

Frontmatter
Chapter 2. Heightened Foreign Economic Policy Uncertainty Shocks on the South African Economy: The Role of Credit Conditions and the Capital Flows Channels
Abstract
This chapter determines the transmission of economic policy uncertainty shocks via selected financial channels and how these impact the credit conditions index (CCI). In addition, the chapter examines whether economic policy uncertainties and credit conditions channels impact the monetary policy responses to positive inflation shocks. Evidence shows that positive foreign economic policy uncertainty shocks lead to a significant reduction in equity and debt inflows. Furthermore, the size of the foreign policy uncertainty shocks matters. Evidence shows that large positive foreign policy uncertainty shocks depress equity inflows more than smaller uncertainty shocks. Credit conditions exhibit prolonged periods of tightening due to positive European, US and China policy uncertainty shocks. The type capital of inflows matters because a reduction in equity inflows amplifies the tightening of credit conditions compared to debt inflows. The repo rate tightens so as to curb positive inflationary pressures irrespective of whether foreign policy uncertainty shocks are endogenous or exogenous in the model. However, a counterfactual analysis shows that the decline in equity inflows which leads to tightening credit conditions exacerbates the adverse impact of monetary policy tightening on GDP growth.
Eliphas Ndou, Nombulelo Gumata, Mthuli Ncube
Chapter 3. UK Economic Policy Uncertainty Shock and the South African Economy: Inferences from the Exchange Rate, Exports and Inflation Channels
Abstract
This chapter assesses whether the South African price stability mandate is impacted by UK economic policy uncertainty shock and whether the shock effects differ when inflation is above and below six percent threshold. Inflation rises whether inflation is below or above six percent but the peak inflation increases are large when inflation is above the six percent threshold. The effects are even larger when UK policy uncertainty persists compared to when it is transitory. Evidence shows that the enforcement of the price stability mandate benefits much from a reduction in UK economic policy uncertainty, which lowers South African consumer price inflation. UK economic policy uncertainty shock has positive spillover to South African, US and European economic policy uncertainties. Furthermore, as long the UK policy uncertainty shock induces an unexpected trade decline in South Africa, the negative trade shock will induce heightened domestic economic policy uncertainty, exchange rate deprecation and these exert inflationary pressures. The South African economic policy uncertainty amplifies the responses of domestic inflation and the exchange rate to UK economic policy uncertainty shocks and this is a risk to price stability.
Eliphas Ndou, Nombulelo Gumata, Mthuli Ncube
Chapter 4. Foreign GDP Growth Uncertainty Shocks and the South African Economy
Abstract
This chapter examines what would have happened to domestic economic growth and the policy rate in the absence of US, UK, European, Germany and Italy GDP growth uncertainty shocks. In addition, this chapter examines whether the evolution of the repo rate in anyway was influenced by uncertainties in foreign GDP growth. We apply the counterfactual approach to determine what the repo rate would have been if the effects of these GDP growth uncertainties are removed. Evidence shows that South African economic growth falls in response to increased foreign economic growth uncertainty shock. The repo rate declines by more than the level that would have prevailed in the absence of the foreign growth uncertainties. Moreover, based on the sources of uncertainties, the European growth uncertainties seem to have led to a significant decline in the repo rate since 2009 when compared to US growth uncertainties. Overall, the policy rate is loosened much more following elevated positive external economic growth uncertainties when the US, UK, European, Germany policy uncertainty channels are allowed to operate in the model than when they are shutoff. This suggests that the economic policy uncertainty channel amplified the loosening in repo rate. However, the amplification is much larger due to the South African economic policy uncertainty compared to those from the UK and Europe. The findings show that a thorough understanding of foreign and domestic economic policy uncertainties linkages is necessary to assist policymakers to design policies that take into consideration the anticipated effects of such shocks.
Eliphas Ndou, Nombulelo Gumata, Mthuli Ncube
Chapter 5. Interaction Between Economic Policy and GDP Growth Uncertainties: Implications for South African GDP Growth
Abstract
This chapter determines and compares the responses of South African economic growth to positive (i) foreign economic policy uncertainties (ii) foreign GDP growth uncertainties and (iii) foreign GDP growth shocks. Does South African economic policy uncertainty act as an inward transmitter and conduit of foreign economic policy uncertainty shock to the domestic GDP growth? Do foreign GDP growth uncertainties act as transmitters and conduits of foreign economic policy uncertainty shock to the South African GDP growth? Does a combination of economic growth uncertainty and policy uncertainty impact domestic exports growth? Evidence in this chapter confirms that economic policy uncertainty tends to exert negative effects on foreign economic growth in this chapter. The negative spillover of foreign policy uncertainty results in a contraction in South African economic growth. In addition, the South African economic policy uncertainty acts as an inward transmitter and conduit of foreign economic policy uncertainty shock to domestic GDP growth. At the same time, foreign GDP growth uncertainties transmit foreign economic policy uncertainty shock to South African GDP growth. However, the big decline in the actual GDP growth than the counterfactual responses implies that South African policy uncertainty leads to the worsening in economic growth contraction following the foreign policy uncertainty shock. Furthermore, positive European GDP growth raises South African exports to the Euro area and the increases are much higher in the long run when South African policy uncertainty is shutoff than when operating in the model. This shows that the exports channel explains why South African economic growth may not benefit to the maximum from the improvement in European GDP growth impulse.
Eliphas Ndou, Nombulelo Gumata, Mthuli Ncube

The Transmission Channels of Exchange Rate, Foreign Demand and Domestic Uncertainty Shocks

Frontmatter
Chapter 6. Real Exchange Rate Fluctuations, Exports and GDP Growth Dynamics
Abstract
This chapter empirically assesses the effects of the REER appreciation shocks on economic activity in particular during and post the recession in 2009. The chapter further assesses how exports growth responds to repo rate tightening shocks when the REER changes are shutoff in model and in the absence of domestic economic policy uncertainty. Furthermore, are there differences between the magnitudes of exports and GDP growth responses to a ten percent REER appreciation shock and a one percent unexpected increase in repo rate? Evidence shows that growth falls by nearly 0.75 percentage points due to a ten percent REER appreciation shock in the third quarter, which is more than double the decline exerted by a monetary policy tightening shock in the fourth quarter after the shock. These results suggest that policy tightening when the exchange is appreciating significantly will tend to exacerbate the adverse effects on exports deterioration, as the shock effects reinforce each other. The REER appreciation shocks lead to a contraction in exports growth. However, the counterfactual evidence shows the exports growth contraction is much larger, when the European, UK and South African economic policy uncertainties are included than when they are shutoff in the model. Evidence shows that GDP growth declines more following a positive repo rate shock when the REER is included than when it is shutoff in the model. In cumulative terms, the REER appreciation accentuates the decline in GDP growth by as much as 0.18 percentage points.
Eliphas Ndou, Nombulelo Gumata, Mthuli Ncube
Chapter 7. The Real Exchange Rate and Sectoral Gross Value Added: The Role of Foreign Demand and Economic Policy Uncertainty
Abstract
This chapter determines the sectors which account for the bulk of the transmission of the REER effects and duration of the responses. Is there a domestic policy uncertainty channel in the transmission of REER appreciation shocks to sector gross value added? In addition, what would have happened to the evolution of gross value add by the construction and financial sectors in the absence of South African policy uncertainty. At a sectorial level, we establish that all sectors reflect heterogeneous responses to the REER appreciation shock. Evidence establishes that amongst the sectors, the manufacturing sector is highly sensitive to REER movements. The manufacturing sector declines following the REER appreciation shock reflecting the dominating impact between the expenditure switching effects and the production costs hypothesis. Hence, we conclude that this is perhaps due to the manufacturing sector trade exposure to low-cost imports and competitors as opposed to the dominance of the benefits of reduced input costs of imported input materials in this sector. The counterfactual analysis indicates that elevated policy uncertainty accentuated the contraction in the construction and financial sectors following the REER appreciation shock. The European growth dominated the REER contributions in dragging sector gross value added growth in 2009Q2–2011Q3.
Eliphas Ndou, Nombulelo Gumata, Mthuli Ncube
Chapter 8. Real Exchange Rate Depreciation Shock and Real Investment Growth: The Balance Sheet Channel
Abstract
This chapter continues on the exploration of the effects of the real exchange (REER) changes on economic activity. The massive depreciation of the REER since 2011 has spurred neither growth nor exports; hence, we search for evidence whether the real exchange rate depreciation as a measure of competitiveness is the key channel to boost growth via the exports channel. Can the failure of the real exchange rate depreciation shock to stimulate economic growth via the exports channel reflect the dominance of its contractionary effects via real investment growth channel? Evidence in this chapter shows that the beneficial effect of real and nominal depreciation via the exports may be neutralised by the contractionary effects of real depreciation on investment and economic growth. The results further show that investment declines more due to large shocks relative to small exchange rate depreciation shocks. This suggests that investment responds asymmetrically to real rand depreciation shocks. This means that policymakers have to place urgency and more weight on efforts to identify the exchange policy and strategy of dealing with the adverse effects of severe deprecation shocks on investment and economic growth. The exchange rate policy has a direct bearing on both mandates of monetary policy makers. In addition, the exchange rate policy and strategy impact the objectives of the National Development Plan and macroeconomic policy to the extent they prize investment lead growth above exports lead growth. When confronted by the large depreciation in the exchange rate, policymakers need to understand the role of the balance sheet channel and the contractionary effects of large depreciations of investment and growth. These effects far outweigh those of competitiveness and exports growth. The results suggest that the balance sheet channel is a drag on investment following the depreciation shock. Implied in this finding is a serious re-assessment of the exchange rate policy.
Eliphas Ndou, Nombulelo Gumata, Mthuli Ncube
Chapter 9. Rand Depreciation and Investment Dynamics: The Role of Imported Intermediate Inputs
Abstract
This chapter examines the extent to which the exchange rate depreciation impacts growth in investment and whether it is impacted by intermediate imports. Evidence shows that the exchange rate depreciation shock lowers growth in investment significantly while intermediate imports rise. The persistence of exchange depreciation shocks matters for growth in intermediate imports. In addition, investment and GDP growth decline more in response to persistently rising NEER depreciation shock than to a non-persistent shock. Thus, evidence shows that increase in intermediate imports costs contributes to the decline in investment and this is a drag economic growth. A counterfactual analysis shows that the NEER depreciation shock leads to a decline in investment, which is much larger in the presence of intermediate imports than when these are shutoff in the model. This evidence shows that growth in the intermediate imports amplifies the responses of investment following a NEER depreciation shock.
Eliphas Ndou, Nombulelo Gumata, Mthuli Ncube
Chapter 10. Exchange Rate Depreciation Shocks and Redistribution of Income: The Marginal Propensity to Consume Channel
Abstract
Is there evidence that the exchange rate depreciation shocks lead to the redistribution of income from workers to producers’ profits? In addition, to what extent do consumer price inflation and exchange rate volatility channels transmit exchange rate depreciation shocks to marginal propensity to consume? Evidence shows that the NEER depreciation shock has contractionary effects on economic growth. This is more so due to the income redistribution effects from workers to producers. The effects are propagated via the inflation channel. The presence of inflation following the NEER depreciation shocks exacerbates the decline in wages. This is in contrast to the magnifying effect of the NEER depreciation shock that raises gross operating surpluses. This suggests that the NEER depreciation redistributes the incomes from workers to producers, and the effects are magnified by inflation levels. Furthermore, price stability matters and a low inflation is ideal. The time varying marginal propensity to consume declines but the contraction is larger due to persistently rising exchange rate depreciation shock than a less persistent shock. In addition, the persistently rising exchange rate depreciation shock leads to a large increase in the Gini coefficient than a less persistent shock. This evidence shows the redistribution of income effects has implications for the time varying marginal propensity to consume and Gini coefficient. Moreover, the time varying marginal propensity to consume declines more in the presence of overall and permanent exchange rate volatility channels than when these are shutoff in the model. This evidence corroborates the findings that the time varying marginal propensity to consume is impacted by the elevated inflationary pressures and the accompanying exchange rate volatility following a NEER depreciation shock. These results show that price and exchange stability matters.
Eliphas Ndou, Nombulelo Gumata, Mthuli Ncube
Chapter 11. Is Macroeconomic Uncertainty a Source of Subdued and Volatile Economic Recovery?
Abstract
This chapter assesses the extent to which macroeconomic uncertainty shocks are an important driver of fluctuations in economic activity. How relevant are the indirect channels in transmitting shocks via the South African economic policy uncertainty channel to consumption expenditure and GDP growth? Evidence shows that positive macroeconomic uncertainty shocks adversely affect economic growth and consumption. In addition, macroeconomic uncertainty magnified the recessionary effects of the global financial crisis on economic growth during the recession in 2009. Moreover, various uncertainties mitigated the contributions from the repo rate reductions in lowering debt serving costs, especially during the recession. Furthermore, persistent macroeconomic uncertainty shocks tend to depress macroeconomic variables more than non-persistent shocks. Hence policymakers should distinguish between persistent and non-persistent uncertainty shocks as the nature of the uncertainty shocks has a bearing on the design of policy responses to deal with households and companies.
Eliphas Ndou, Nombulelo Gumata, Mthuli Ncube
Chapter 12. Real Exchange Rate and Implications for Monetary Policy
Abstract
This chapter determines the implications of real exchange rate shocks on the repo rate adjustment and inflation dynamics. This chapter, examines the indirect role of exports in transmitting exchange rate shocks to policy rate and the relevance of policy uncertainty channel. Evidence based on historical decomposition reveals that during 2007 and 2009, the REER depreciation contributed to the evolution of inflationary pressures. The massive REER appreciation in 2009 contributed to the decline in inflation. Despite the persistent depreciation in the REER since 2011, there is no evidence of persistent REER depreciation effects placing upward pressure on inflation until recently in 2013Q1. Moreover, the monetary policy stance was still accommodative in 2013Q1–Q3, even though the REER depreciation contribution to inflation was just beginning to be positive. Is the exchange rate a shock absorber or an independent source of shocks itself? Evidence based on a historical contributions approach suggests that the fundamentals as captured by the variables in the model seem to explain large movements in the REER. Evidence presented in this chapter suggests that the exchange rate is a shock absorber to changes in fundamentals. What can be inferred about the role of EU economic growth shocks on the REER movements? Evidence shows that after shutting off the contributions from own REER contributions and the EU economic growth, the massive REER appreciation in 2009 can be partly attributed to the policies aimed at dealing with external growth developments and less to due to the REER own movements. This suggests that slow EU economic growth and the ECB policy interventions aimed at averting the deflationary pressures will continue to impact REER changes. Foreign policy shocks can result in the appreciation of the REER thus compromising the competitiveness of the domestic economy. However, the benefit to the economy may be transmitted through the positive effects on exerting downward pressure on inflation. In monetary policy terms, this can support the gradual policy tightening and normalisation cycle.
Eliphas Ndou, Nombulelo Gumata, Mthuli Ncube
Chapter 13. Domestic Macroeconomic Uncertainty: What Are the Financial Stability EffectsFinancial stability effects ?
Abstract
This chapter determines if there exists a financial channel that transmits domestic macroeconomic uncertainty shocks. Does South African economic policy uncertainty have a direct and indirect role on the real economy via the propagation of the financial shock effects. Evidence shows that while macroeconomic uncertainties can be sources of shocks, they can also be transmitters of the unexpected economic disturbances. Furthermore, debt service costs and monetary policy shocks are transmitted via the economic policy uncertainty channel. Evidence indicates that uncertainty impacted the evolution of debt service costs during the recession in 2009 and neutralized the effects of a reduction in the repo rate at that time. These findings corroborate evidence showing that risk re-pricing and increased funding costs largely on account of elevated growth and policy uncertainty during and post the financial crisis. These results are consistent with the transmission of uncertainty shocks to the real economy via the precautionary channel as well as the increase in the cost of debt financing.
Eliphas Ndou, Nombulelo Gumata, Mthuli Ncube
Chapter 14. Financial Regulation Policy Uncertainty, Lending Rate Margins and Credit Growth
Abstract
What are the effects of financial regulation policy uncertainty (FRPU) on the business cycle, monetary policy and lending spreads? Evidence reveals that banking sector financial frictions as measured by the FRPU and lending rate margins affect the business cycle fluctuations and the transmission of monetary policy settings. In addition, the FRPU shocks, which capture uncertainty about regulation and supervisory issues, contributed significantly to the reduction in credit extension. Furthermore, the instalment rate margins fluctuations are self-induced relative to those induced by FRPU. This evidence is consistent with the bank’s internal reassessment of the riskiness of certain types of bank lending and clients, and changes in banks’ business strategies. Such practices can affect the intermediation of credit and also impede the desired easing effects of monetary policy on the quantities or volume of new loans. Nodari (2014) suggests that the FRPU adverse effects imply that policymakers should pay considerable attention to the design of financial regulation from the credibility and policy management perspectives. This is because lack of transparency in the policy design can have adverse macroeconomic effects. Hence, while the trade-off exists between policy correctness and decisiveness, there should be no ambiguity in policies on which many economic agents depend on to engage in purposeful production and spending decisions.
Eliphas Ndou, Nombulelo Gumata, Mthuli Ncube

The Role of US Monetary Policy, Capital Flows, Business Confidence and Rand Per US Dollar Volatility

Frontmatter
Chapter 15. The Macroeconomic Effects of the Expected US Monetary Policy Normalisation ShockUS monetary policy normalisation shock on the South African Economy
Abstract
This chapter examined what would happen to the South African economy when the US Fed is expected to normalise its policy rate as opposed to what happens to the domestic economy when the US Federal Funds Rate is raised. Evidence suggests that when policymakers consider the prevailing macroeconomic conditions, the repo rate adjustment will vary and be significantly lower compared to when the policymakers fail to pay attention to domestic conditions. Thus, prevailing macroeconomic conditions matter for the monetary policy reaction function. The expected US monetary policy normalisation shock depresses domestic economic growth, stock market activity, exports growth and liquidity growth. At the same time, the exchange rate depreciates transitorily followed by significant appreciations. This finding strengthens the argument that expectations of the US monetary policy normalisation before the actual policy rate increase have adversely affected the South African economy. Furthermore, the repo rate adjustment to US policy adjustment may not be as aggressive as this action may exacerbate the adverse effects linked to communication prior the actual Fed rate hike. The results in this chapter suggest that the bulk of the normalisation shock has been discounted. Therefore, the expectations of the Fed normalisation of policy settings are not necessarily a binding constraint on SARB policy decisions. Rather, prevailing macroeconomic conditions matter more for the South African monetary policy reaction function. In addition, large negative US policy shocks lead to bigger negative effects on the SA economy compared to small positive policy shocks. This shows that a reduction in the expected US monetary policy normalisation shock will to a large extent minimise the South African policy uncertainty.
Eliphas Ndou, Nombulelo Gumata, Mthuli Ncube
Chapter 16. Monetary Policy and Exchange Rate VolatilitiesMonetary policy and exchange rate volatilities : Implications for Output Dynamics
Abstract
This chapter examined the extent to which the volatility in the differential between the South African repo rate and the US Fed Federal funds (FFR) rate matters for the exchange rate and the economic activity. Evidence shows that positive monetary policy volatility shocks depress economic output. Moreover, the effects of the positive exchange rate volatility shocks on economic growth are accentuated when monetary policy volatility is included in the model. This suggests that a synchronised occurrence of the exchange rate and monetary policy volatilities is bad for output growth. The policy implication is that in the immediate aftermath of elevated exchange rate volatility, monetary policy stability is likely to be particularly effective in mitigating the adverse economic effects.
Eliphas Ndou, Nombulelo Gumata, Mthuli Ncube
Chapter 17. Capital Flow EpisodesCapital flow episodes and Real Economic Costs of Flow Episodes
Abstract
Does domestic economic policy uncertainty transmit capital inflow surges and sudden stop shocks to GDP growth? Evidence in this chapter shows that elevated policy uncertainty prevents GDP growth from rising more due to capital inflow surges shock and accentuates the decline more due to sudden stop shocks. In addition, elevated domestic economic policy uncertainty shock raises the likelihood of sudden stop episodes and reduces the likelihood of capital inflow surges episodes following an unexpected reduction in VIX. Evidence shows that sudden stops as defined using metrics in Forbes and Warnock (2011) are associated with a significant slowdown in economic growth, stock market activity and currency depreciation. In contrast, capital inflow surge episode shocks raise economic growth, appreciate the exchange rate, lower inflation, and the raise stock market. Evidence indicates that VIX a non-domestic factor significantly raise the likelihood of sudden stops episodes while reducing the likelihood of surges episodes. This has implications on how policymakers should deal with capital inflow episodes because global risk is a driver of capital flow volatility but this is outside the control of policymakers and poses policy dilemmas. First, in line with Forbes and Warnock (2011) evidence suggests that policymakers concerned about effects of capital flow volatility should prioritise strengthening the country’s ability to withstand the volatility. Second, this analysis shows policymakers should heed that foreign and domestic investors can be motivated by different factors and react differently to various policy interventions and other shocks.
Eliphas Ndou, Nombulelo Gumata, Mthuli Ncube
Chapter 18. Transitory and Permanent Components of the Exchange Rate Volatility
Abstract
This chapter decomposes aggregate exchange rate volatility into permanent and transitory volatility components and determines their shock effects on the macroeconomy. What would have happened to the growth of gross value added by the manufacturing sector in the absence of elevated South African economic policy uncertainty changes to positive exchange rate volatility shocks? We find that an unexpected positive shock to aggregate and permanent exchange rate volatility depresses output for longer periods. But leads to a decline in inflation and repo rate consistent with the predictions of the Taylor rule and the Phillips curve. This evidence confirms that exchange rate volatilities and other policy uncertainties are indeed demand shocks and monetary policy has a role to mitigate the adverse effects. With respect to transitory exchange rate volatility shocks, we find that they are accompanied by unresponsive inflation and an insignificant decline in the repo rate. Aggregate exchange rate volatility explains more fluctuations in economic growth than permanent and transitory exchange rate volatilities. The contributions of aggregate and permanent exchange rate volatility components were a severe drag on economic growth, particularly during the recession in 2009. Therefore, the policy implication is that in the immediate aftermath of an exchange rate shock, it is critical to distinguish the relative contributions of the transitory and permanent components of shocks on the economic outlook. Counterfactual evidence shows that elevated South African economic policy uncertainty accentuated the decline in manufacturing sector gross value added following positive exchange rate volatility shocks.
Eliphas Ndou, Nombulelo Gumata, Mthuli Ncube
Chapter 19. Does the Rand Per US Dollar Exchange Rate Volatility Impact on Net Asset Purchases by Non-residents?
Abstract
This chapter examined whether exchange rate volatility impacts net asset purchases by non-residents and determined if the effects vary amongst overall, permanent and transitory exchange rate volatilities. Evidence attests to the volatile and the transitory nature of capital flows, this is particularly the case for bond flows. This has serious policy implications for the design of policies aimed at controlling capital flows, reducing financial market distortions and the associated exchange rate movements. The variance ratios of net asset purchases by non-resident decline as the forecast horizons increase. The halflife analysis of shocks attests to the very short-term nature of net asset purchases by non-residents. Furthermore, we find that the rand depreciation shock has a bigger impact on the slowdown of net equity purchases by non-residents. This means that it is not only difficult to predict longer-term net asset purchases based on the information conveyed by current flows, but there is also a significant positive feedback loop indicating reinforcement of the effects. We contend that if capital flows exhibited some form of persistence and therefore predictability, policymakers would be able to anticipate the exchange rate movements with some degree of confidence. This would alleviate a great deal of uncertainty with respect to the inflation forecast and possibly assist with the predictability of the monetary policy responses. Furthermore, it would help with the design of policy measures aimed at dealing with the unintended effects of volatile capital flows. At the same time, possibly reduce doubts about the efficacy of capital flow controls.
Eliphas Ndou, Nombulelo Gumata, Mthuli Ncube
Chapter 20. Business Confidence Shocks and the Relevance of Exchange Rate Volatility and Economic Policy Uncertainty Channels
Abstract
This chapter determines the role of business confidence on economic growth by applying the counterfactual analysis. In addition, what would have happened to South African economic growth following positive the US and China economic growth shocks in the presence and absence of the business confidence channel. The chapter further examines the role of exchange rate volatility and economic policy uncertainty in the transmission of negative business confidence shocks to GDP growth, consumption expenditure growth and exports growth. Evidence shows growth in GDP, consumption and exports growth decline much more in the absence of exchange rate volatility following a negative business confidence shock than when volatility is shutoff in the model. In addition, evidence shows that South African GDP growth and consumption expenditure decline more due to negative business confidence shock in the presence of elevated economic policy uncertainty. The results suggest that business confidence plays an integral part in propagating or amplifying the positive growth spillovers from the US and China into South African GDP growth. At the same time, evidence shows that shutting off the effects of confidence to external growth shocks results in trajectories of economic growth that are dampened compared to when confidence is not purged.
Eliphas Ndou, Nombulelo Gumata, Mthuli Ncube
Chapter 21. Domestic Macroeconomic Uncertainty Shock and the Consumer Confidence Channel
Abstract
This chapter determines whether business confidence responds to macroeconomic uncertainty shocks. In addition, what is the role of the South African economic policy uncertainty in transmitting manufacturing uncertainty and repo rate tightening shock to business confidence. Evidence shows that positive macroeconomic uncertainty shocks exert adverse effects on business confidence. In addition, heightened South African economic policy uncertainty worsens the decline in business confidence following elevated uncertainty in manufacturing and repo rate tightening shocks.
Eliphas Ndou, Nombulelo Gumata, Mthuli Ncube
Chapter 22. Asymmetrical Real Exchange Rate Risk Effects on South African and US Exports Growth
Abstract
This chapter shows that the real exchange rate depreciation shocks have a positive effect of increasing exports consistent with theoretical predictions. However, the negative impact of the exchange rate risk tends to partially or completely offset these positive effects thus can ultimately even ultimately reduce exports. Evidence indicates that real exchange depreciation shocks have a greater effect on future real exchange rate volatility than the real exchange rate appreciation shocks of the same magnitude. We investigated the asymmetric exchange rate volatility effects on exports during appreciations and depreciations. We did not find strong support for the asymmetry exchange rate risk hypothesis. But the results under asymmetric models suggest that exporters are sensitive to appreciations compared to depreciations. The results show that the exchange rate risk reduces the impact of the exchange rate depreciation on exports growth by an estimated 34 percent. However, this is a smaller offsetting impact which neutralises the stimulating effects of the exchange rate on exports growth compared to when this risk impact is modelled to depend on exchange rate appreciation state. The policy implication is that the exchange rate risk effects seem to be larger in the presence of exchange rate appreciations. Moreover, there is no evidence to support the asymmetric hedging behaviour hypothesis consistent with the alternative explanation that exporters respond more to appreciations than to depreciations.
Eliphas Ndou, Nombulelo Gumata, Mthuli Ncube
Chapter 23. Exchange Rate Depreciation, Risk and Exports: A Counterfactual VAR Approach
Abstract
This chapter quantifies the net effects of the real exchange rate depreciation after excluding the effects of the exchange rate risk and shows these differ according to certain assumptions. The analysis differentiates the effects when risk is expected, unexpected and the additional effects due to exports risk. Evidence shows that the percentage reduction in the cumulative exchange rate depreciation effects on exports growth vary according to whether risk is aggregated, permanent and transitory. Evidence shows that the exchange rate risk matters for the transmission of positive US economic policy uncertainty shocks to South African exports growth to the US. Furthermore, the interaction between the exchange rate depreciation and risk shows that the stimulatory depreciation effects are reduced much more in the presence of elevated exchange rate and exports risk. In addition, evidence shows that permanent exchange rate risk worsens the decline in exports following the US economic policy uncertainty shocks compared to transitory exchange rate risk.
Eliphas Ndou, Nombulelo Gumata, Mthuli Ncube
Chapter 24. South African Exporters and the Pricing-to-Market Strategy
Abstract
This chapter assesses whether South African exporting firms practise the pricing-to-market (PTM) behaviour. Evidence indicates that exporters practise the PTM strategy to stabilise the effects of the exchange rate fluctuations on their exports. This is especially the case when the exchange rate appreciates relative to when it depreciates. Exporters adjust their profit margins and allow a small pass-through of the exchange rate changes into changes in export prices. A PTM coefficient of −0.52 percent is estimated for the period 2000–2012 implying that exporters reduce their profit markup by 5.2 percent and raise their selling price abroad by 4.8 percent following a 10 percent appreciation in the Rand exchange rate relative to trading partners. The appreciation in the exporters currency implies that the price paid using the importers currency will increase by 5.2 percent rather than a full 10 percent if there is complete exchange rate pass-through. A lack of the complete pass-through of the exchange rate is also observed during depreciations. Such practices imply that the stimulating abilities of a weaker currency as indicated by international economics theory may fail to spur exports growth contrary to expectations. Such tendencies by exporters tend to counter the effect of exchange rate fluctuations.
Eliphas Ndou, Nombulelo Gumata, Mthuli Ncube
Chapter 25. Does the Inflation Threshold Lead to Asymmetric Effects of the Rand Per US Dollar Exchange Rate Changes on Inflation?
Abstract
Are there differential effects exerted by appreciations and depreciations, particularly during prolonged periods of either exchange rate depreciations or appreciations? First, we establish that mean inflation is around 5.64 percent during depreciation episodes compared to 4.59 percent during appreciation episodes. This means that depreciations are associated with inflation close to the upper band of the inflation target. Furthermore, inflation is four times more sensitive to depreciations than to appreciations. For instance, a 10 percent depreciation in the exchange rate is likely to add 0.4 percentage points to inflation, relative to just 0.1 percentage points from appreciations. Thus, exchange rate depreciation episodes are likely to be inflationary. On the other hand, appreciations episodes do bring about marginal disinflation. Second, the findings suggest that inflation responds asymmetrically to different magnitudes and directions of the exchange rate shocks subject to the inflation threshold. The inflation rate increases by big magnitudes due to the Rand per US dollar depreciation compared to the appreciation in the high and the low inflation regimes. The observed non-linearity is consistent with the menu costs theory of price adjustment. This suggests that the policymakers’ caution that exchange rate deprecations are a threat to inflation is a binding constraint. This is because the mean inflation is high such that any depreciation pushes inflation outside the band. This is irrespective of whether the exchange rate pass-through has declined or not. Thus a gradual policy response to the inflationary is ideal.
Eliphas Ndou, Nombulelo Gumata, Mthuli Ncube
Backmatter
Metadata
Title
Global Economic Uncertainties and Exchange Rate Shocks
Authors
Dr. Eliphas Ndou
Nombulelo Gumata
Prof. Mthuli Ncube
Copyright Year
2017
Electronic ISBN
978-3-319-62280-4
Print ISBN
978-3-319-62279-8
DOI
https://doi.org/10.1007/978-3-319-62280-4