The impact of exchange rate misalignments on economic growth of the South African Customs Union.

Abstract

The dissertation examines the impact of exchange rate misalignments on the economic growth of five countries in the SACU region: South Africa, Lesotho, Namibia, Swaziland and Botswana, using annual data from 1995 to 2012. First and second generation unit root tests are used in order to take into account the existence of structural breaks and cross-sectional dependence. After determining the existence of a cointegration relationship using both Pedroni (2004) and Westerlund (2007) tests, exchange rate misalignments are computed as a deviation of exchange rates from their long-run determinants; estimated using the Pesaran et al.(1997; 1999) mean-group and pooled mean-group. We found that by using the mean-group estimator, the different currencies are overvalued as suggested by Asfaha and Huda (2002) and Saayman (2007), for both the South African and Botswanan currency. Focusing on the results from the mean group, as this estimator is efficient in the presence of cross-sectional dependence in the data, we assessed the impact of misalignment on economic growth using the system-GMM due to the existence of autocorrelation and endogeneity. We found that exchange rate misalignments are not significant in explaining economic growth, even when controlling for terms of trade and openness.