The determinants of real exchange rate volatility in South Africa

This paper investigates the determinants of medium to long-run real exchange rate volatility in South Africa over the period 1986-2015. The main objective of the paper is to analyse the impact of trade openness on real exchange rate volatility following conflicting results offered by empirical studies. Employing the Autoregressive Distributed Lag (ARDL) cointegration approach and using a variety of specifications and robustness tests, results show that trade openness has an impact on real exchange rate volatility. The interaction term of trade openness and the dummy variable for capital account liberalisation leads to a significant negative impact on real exchange rate volatility. Furthermore, findings indicate that volatility of output, commodity prices, money supply and government consumption, and the exchange rate regime significantly influence rand volatility.