The Impact of Exchange Rate Uncertainty on Exports in South Africa

Abstract

This paper examines the impact of real effective exchange rate uncertainty (REER) on aggregate exports of South Africa for the period 1986Q4–2013Q2. Using a bivariate framework where the structural vector autoregression (VAR) is modified to accommodate bivariate GARCH-in-Mean (GARCH-M) errors, we find that exchange rate uncertainty has a significant and negative effect on exports. Comparing the response of exports to a shock in exchange rate from a model that includes the REER uncertainty with results from a model that restricts the coefficient of the exchange rate uncertainty to zero, we find that the response is more pronounced in the former model. Furthermore, real exports respond asymmetrically to negative and positive shocks of REER of the same size.