Is the Exchange Rate a Shock Absorber or a Source of Shocks? Evidence from South Africa
Date
2026
Authors
Trust R. Mpofu
Journal Title
Journal ISSN
Volume Title
Publisher
AERC
Abstract
This paper investigates empirically whether the exchange rate in South Africa acted as a shock absorber or a source of shocks over the period 2000Q2-2019Q4 using the data sourced from the IMF’s IFS and FRED. Finding the answer to this question is important because South Africa’s exchange rate is more volatile relative to peers and such exchange rate fluctuations might be good or bad for the economy. The period of the study is to test the shock-absorbing properties of the flexible exchange rate regime following mixed empirical evidence. The study employs a Bayesian structural VAR using sign restrictions to identify supply, demand, and monetary shocks for a three-variable VAR, and supply, demand, monetary policy, and exchange rate shocks for a four-variable VAR. The results show that demand shocks explain most of the variance in the real exchange rate, while other shocks play a small role, which suggests that the exchange rate acted as a shock absorber. The results also show that demand shocks explain most of the variability in the prices. These results suggest that policymakers should monitor and stabilise fluctuations emanating from the demand side given the SARB’s mandate of price stability.