Abstract
The objective of the paper is to examine the deviations of the nominal exchange rates from the purchasing power parity level (real exchange rate) over the period 1979-94 using monthly data. The long-run behaviour of real exchange rates is explained by a structural approach and cointegration methodology. It is found that the long-run equilibrium real exchange rate responds to fundamentals, namely the gold price, productivity growth, transport costs and tariffs and terms of trade changes. In the short-run, domestic and foreign debt burdens influence the behaviour of the real exchange rate. Our analysis indicates that productivity growth in South Africa appreciates the real exchange rate against the US dollar in the long-run, while there seems to be no significant effect in the short run.
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