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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.
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- Chapter 1
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