Our website has detected that you are using an outdated browser that will prevent you
from accessing
certain features. An upgrade is recommended to improve you browsing experience.
No 15: Capital controls and the volatility of South African exchange rates
Published Date:
2005-12-18
Author:
G N Farrell
Last Modified Date:
2020-10-01, 09:31 PM
Category:
Publications > Occasional Papers
This paper considers whether the imposition of capital controls in South Africa affected the stochastic behaviour of foreign exchange rates, and provided insulation to the commercial exchange rate of the rand. The conditional variances of various South African exchange rates are estimated using autoregressive conditional heteroschedastic (ARCH)-type models, and used to test for shifts in the volatility processes of these exchange rates. The common features methodology of Engle and Kozicki (1993) is employed to test for a common volatility process in the dual exchange rates, and the presence of volatility spillovers between the exchange rates is also investigated. The results of these tests suggest that the conditional volatility of South African exchange rates was lower during the financial rand period than in the contiguous periods when the exchange rate was unified, and that volatility in the finan-cial rand did not impact on the commercial rand exchange rate. No evidence was found of a common volatility process in the dual foreign exchange rates, and although tests revealed volatility spillovers from the commercial rand exchange rate to the financial rand, volatility was not found to “spill over” in the opposite direction. “In a dual-rate system the commercial rate remains stable, whereas the free rate reflects the instability of portfolio holders’ expectations, and hence of capital flows.” Dornbusch and Kuenzler (1993:120)