The Effects of exchange rates on bilateral trade balances of SACU members states with their trading partners
- Authors: Mhaka, Simbarashe
- Date: 2020
- Subjects: Economic development -- South Africa , Purchasing power parity -- Econometric models
- Language: English
- Type: Thesis , Doctoral , PhD
- Identifier: http://hdl.handle.net/10948/50371 , vital:42152
- Description: The fluctuations of exchange rates prevent countries from achieving stability in their external account records. Appreciation or depreciation has effects on international trade. This thesis examines the relationship between exchange rate fluctuations on bilateral trade balances focusing on the SACU region. There are several theories made to explain the relationship between exchange rate and trade balances. In examining this phenomenon, this thesis will unveil if the purchasing power parity theory, the Marshall-Lerner condition and the J-curve effect holds in the Southern African Customs Union (SACU) countries. This analysis is divided into three parts. The first part examines the stability of the exchange rate in the SACU countries in the long run as given by the purchasing power parity. To test for the Purchasing Power Parity theory, the recently developed powerful unit root test was applied with multiple smooth structural breaks of Omay (2015), based on a Fractional Frequency Flexible Fourier Form (FFFFF) on unique data of SACU countries covering the monthly period of 1995M01-2017M11. The Purchasing Power Parity (PPP) results show that the nominal effective exchange rate (NEER) of all SACU members does not provide evidence for PPP theory. In terms of the real effective exchange rate (REER), the PPP condition holds in the case of South Africa only. Further unit root investigations were carried out using the panel data for all SACU members, NEER and REER. The FFFFF test results for panel data shows strong evidence of the PPP while the standard DF test rejects PPP theory in the SACU’s NEER. Both the standard DF and the FFFFF tests show strong evidence of PPP theory in the case of SACU’s REER. The second section of the analysis examines the Marshall-Lerner condition employing annual data from the period of 1980-2017. The import and export model were examined firstly in a time series format and then in a panel data format. The time series data was examined using the ARDL (PMG) model while the panel data used the panel ARDL, fully modified OLS (FMOLS) method and the Dynamic OLS (DOLS) method of estimation. The PMG/ARDL model shows no evidence to support the existence of the Marshall-Lerner condition in the short run for all SACU members. However, only two out of five countries show evidence of the Marshall-Lerner condition in the long run. There is strong evidence of the Marshall-Lerner condition in Namibia and Botswana in the long run using the PMG/ARDL model.
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- Date Issued: 2020
Purchasing power parity in a newly industrialised country
- Authors: De Villiers, David James
- Date: 2019
- Subjects: Foreign exchange rates -- Econometric models , Purchasing power parity -- Econometric models , Purchasing power
- Language: English
- Type: Thesis , Masters , MCom
- Identifier: http://hdl.handle.net/10948/39578 , vital:35292
- Description: A newly industrialised country (NIC) is a nation whose rapid industrial growth is delivering high levels of economic development. The ‘NIC’ term is however inappropriately applied: thus this study develops a fresh exposition of the concept. Argentina, Brazil, China, Egypt, India, Indonesia, Malaysia, Mexico, Philippines, Russia, Thailand, Turkey, Vietnam, and South Africa are identified as supposed present-day NICs. Regardless of the industrialisation strategy being pursued, NICs experience exchange rates misaligned in terms of equilibrium value. This can lead to an unpredictable exchange rate, and the failure of the empirical validation of the purchasing power parity (PPP) hypothesis. Theory suggests that there exist several frictions to price movements which manifest themselves as nonlinear adjustment processes. Common empirical methodologies for evaluating PPP are however inadequate in accounting for these phenomena. To close the gap between theory and empirical evidence, the Kapetanois-Shin-Snell unit root test, augmented with flexible Fourier functions with fractional frequencies (KSS-FFFFF), is conducted in order to empirically validate the PPP hypothesis when applied to NICs. This model is capable of capturing heterogeneous smooth transitions in regime switching, and approximating unknown structural breaks in the time series. The researcher developed a novel numerical method in the form of a binary search algorithm for selecting the optimal fractional frequency of the flexible Fourier functions. This procedure significantly reduces both the approximation error and the computational cost of flexible Fourier functions with fractional frequencies. The main result of the study is that all NIC’s real exchange rates are mean-reverting over the annual and monthly periods of 1960-2016 and 1970:1-2017:11. Therefore the traditional Casselian version of PPP holds true in each NIC.
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- Date Issued: 2019