The relationship between oil prices and the South African Rand/US Dollar exchange rate
Date
2016
Authors
Masuku, Melusi
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Abstract
In this study we examine the relationship between international oil prices and the South African Rand/US Dollar exchange rate. We also determine the direction of causality between these two variables. We further ascertain the magnitude of the influence of oil prices to the exchange rate compared to other theoretically driven macroeconomic variables. A forecasting exercise is also undertaken to determine whether oil prices contain information about future Rand/Dollar exchange rate. Drawing from the works of Aliyu (2009) and Jin (2008) we use VAR based cointegration technique and vector error correction model (VECM) for the long run and short run analysis respectively. The results show that there is a unidirectional causality running from oil prices to exchange rate and not the other way round. We also find that a 1% permanent increase in oil prices results in 0.17% appreciation of the Rand against the US Dollar; a 1% permanent increase in money aggregates results in 21.3% depreciation of the Rand and a 1% increase in business cycles results in 0.29% depreciation of the Rand in the long run. A 1% increase in inflation and interest rates is found to result in a 0.09% and 0.005% depreciation on the Rand respectively. Our short run analysis indicates that 4.4% of the Rand/Dollar exchange rate disequilibrium can be corrected within a month. Oil prices are found to contain some information about the future Rand/US Dollar exchange rate when the VAR model is used for forecasting. This study has shown there is a causal relationship between oil prices and the strength of the Rand against the Dollar and, therefore, recommends diversification of the economy and more use of green energy. Strategies to reduce capital flight and trade-related capital is also recommended by this study.
Key Words: Exchange rate, Oil price, forecasting, vector autoregressive (VAR) model, cointegration, vector error correction model (VECM), causality
Description
RESEARCH THESIS SUBMITTED TO THE FACULTY OF COMMERCE, LAW & MANAGEMENT IN PARTIAL FULLFILMENT OF THE REQUIREMENTS OF THE MASTER OF MANAGEMENT IN FINANCE & INVESTMENTS DEGREE
UNIVERSITY OF THE WITWATERSRAND
JOHANNESBURG
February, 2016
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Citation
Masuku, Melusi (2016) The relationship between oil prices and the South African Rand/US Dollar exchange rate, University of the Witwatersrand, Johannesburg <http://wiredspace.wits.ac.za/handle/10539/21505>