Exchange rate and GDP nexus in South Africa: the disconnect after the 2008 global recession

Abstract

This paper estimates the long-run impact of the exchange rate depreciation on GDP in South Africa and whether it changed after the 2008 global financial crisis. The paper further determines whether certain channels amplified or dampened the transmission of exchange rate deprecation to GDP after the crisis. The long-run relationship estimated using fully modified ordinary least squares, dynamic ordinary least squares, and ordinary least squares indicates a one percent exchange rate depreciation raises GDP by less than 1.4 percent. Evidence from the model with the interactive global financial crisis dummy and exchange rate shows that the impact of the exchange rate depreciation on GDP was diminished after the crisis. The counterfactual analysis reveals that the exchange rate volatility, foreign demand, investment, imported intermediate inputs, consumption, consumer price level, and export volume channels dampened the stimulative effects of the exchange rate depreciation on GDP post-2008. This evidence indicates a disconnect between the exchange rate depreciation and the GDP relationship. This implies that policymakers cannot rely on the exchange rate depreciation as a potent macroeconomic stabilization policy tool and may not achieve the National Development Plan growth objective via an export-led growth strategy.