Exchange Rate Undervaluation and Sectoral Performance of the South African Economy

Abstract

The paper uncovers the channels through which real exchange rate undervaluation influences the performance of the South African economy. We decompose the South African economy into three sectors, namely: agriculture, industry, and service. Using the OLS (with Newey-West and robust standard errors), and GMM estimation techniques; an annual time series data covering the period 1962-2014; and a standard regression model for each sector, we find: (i) real exchange rate undervaluation to exert positive impact on economic performance by enhancing agricultural sector, and industrial sector performance; (ii) real exchange rate undervaluation to exert a negative impact on economic performance by reducing the performance of the service sector