The Determinants of Time-Varying Exchange Rate Pass-Through in South Africa

• Published in: The South African Journal of economics Vol. 82; no. 4; pp. 603 - 615
• Main Authors: Jooste, Charl, Jhaveri, Yaseen
• Format: Journal Article
• Language: English
• Published: Johannesburg Blackwell Publishing Ltd 01.12.2014; Wiley Subscription Services, Inc
• Subjects: Bayesian modelling; Consumer prices; Consumers; Determinants; E31; Exchange rates; Foreign exchange rates; Inflation; Monetary policy; Price increases; Prices; RAND; South Africa; Studies; Time; Time series; Time-varying pass-through; South Africa
• ISSN: 0038-2280; 1813-6982
• DOI: 10.1111/saje.12058

The pass‐through of shifts in the rand exchange rate to consumer price inflation has been well documented for South Africa. Although estimates of the absolute level of pass‐through vary, some studies document a decline in pass‐through over time. In order to better illuminate the policy implications of pass‐through, this paper seeks to add to the literature by decomposing pass‐through into a number of time‐varying impulses. This has the advantage of providing deeper insights of pass‐through over time and across various monetary policy regimes. We then analyse the determinants of time‐varying pass‐through. Our results confirm that pass‐through has declined over time but is subject to a stable and low inflation environment. We also show that a volatile exchange rate leads to higher pass‐through.