The Consequences of Policy Uncertainty: Disconnects and Dilutions in the South African Real Effective Exchange Rate-Export Relationship
31 Pages Posted: 9 Dec 2016
Date Written: June 2016
In recent years, the link between the real effective exchange rate (REER) and exports inSouth Africa has weakened. While exports still rise in response to REER depreciations, the REER-export elasticity is below historical estimates. The literature has put forward a number of possible explanations, from multi-national supply-chains to muted exchange rate pass-through.This research explores the role of policy uncertainty in reducing the responsiveness of exports to relative price changes. We construct a novel 'news chatter' measure of policy uncertainty and examine how it, paired with other supply-side constraints, can improve our understanding of export performance. We find that increased policy uncertainty diminishes the responsiveness of exports to the REER and has short and long-run level effects on export performance. Finally, we show that a measure of competitiveness that adjusts for uncertainty and supply-side constraints greatly outperforms the REER in tracking exports performance.
Keywords: Real effective exchange rates, South Africa, Exchange rate depreciation, Exports, Price elasticity, Export performance, Economic policy, Competitiveness, Exports, Policy Uncertainty, Real Effective Exchange Rate
JEL Classification: D80, E32, F14
Suggested Citation: Suggested Citation