7. The Real Exchange Rate and Sectoral Gross Value Added: The Role of Foreign Demand and Economic Policy Uncertainty

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.