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The South African rand, fundamentals and commodity prices
Abstract
This paper revisits the exchange rate-fundamentals debate for the case of the South African Rand; emphasising the role of commodity prices. The exchange rate determination puzzle has been at the heart of exchange rate studies since the Meese-Rogoff (1983) seminal paper. We use floating nominal exchange rate data for South Africa and find evidence in support of a long-run relationship in the commodity-price augmented PPP and monetary models for South Africa. We demonstrate that inclusion of commodity prices improves the in-sample fit of canonical exchange rate model specifications. With respect to out-of-sample short-horizon forecasts, inclusion of commodity prices does improve accuracy although this result is not robust to model and horizon specification.
Keywords: Commodity prices; Exchange rates; Structural models.