6. Real Exchange Rate Fluctuations, Exports and GDP Growth Dynamics

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.