Themba Tenza, Program Director of the School of Economics and Finance, Professor Nichola Tennassie and Dr Richard Simson, Senior Lecturers at the School, for their role as excellent mentors during my studies.
INTRODUCTION 1
The choice of the sample period, 1994Q1-2003Q4, was also appropriately chosen to show the performance of the exchange rate during the ten years of the new dispensation in South Africa. PZA / PCH = the ratio of the average market price of goods in South Africa to the average market price of goods in Switzerland; and.
THEORETICAL FRAMEWORK: EXCHANGE RATE
The Purchasing Power Parity (PPP) and the Interest Rate Parity (IRP) Models 7
- The Purchasing Power Parity Model 7
- Causes of divergence from PPP 9
- Empirical Evidence on PPP 10
- Interest Rate Parity (IRP) Model 13
The Balance of Payments Approach 17
The reduction in imports then leads to a narrowing of the gap between imports and exports on the current account. Ultimately, the knock-on effect of an increase in national income is reflected in the improvement of the current account balance.
The Portfolio-Balance Model 19
This new conceptualization of the capital account crystallizes into two different categories of asset balance models: the monetary approach to the balance of payments and the portfolio balance approach. By doing so, it allows private sector savings to take the form of foreign currency accumulation through the capital account of the balance of payments.
The Dornbusch (Sticky Prices) Model 21
In an attempt to better explain exchange rate determination, a hybrid model was formulated in the mid-70s, which we will see in the following section. This situation demonstrates exchange rate behavior in which the initial jump in the exchange rate exceeded the adjustment in the long-run equilibrium rate.
The Rational Expectations (RE) Model 23
Similarly, increases in the foreign relative price of non-tradable goods were associated with significant depreciations in the real exchange rate. In the time series approach, the model relates the current values of the regressor (dependent variable), for example the ratio between price and exchange rate, with the past values, as well as the past values of the regressor (independent variable), i.e.
The ‘News’ Model 29
Summary 33
The exchange rate literature has benefited substantially from the contributions of approaches or models such as the purchasing power and interest rate parities, the balance of payments, the portfolio balance, sticky prices, the RE and the 'news' models. In the BOP floating exchange rate version, which prohibits capital flows, an increase in national income appears to dampen the current account and weaken the exchange rate.
PRODUCTIVITY BIAS HYPOTHESIS (PBH) IN
- Productivity Bias Hypothesis : Conceptual Framework 36
- Productivity Bias-Hypothesis : Rationale 38
- Productivity and Real Exchange Rate 40
- Productivity Bias Hypothesis : Empiricism 45
- Summary 53
Primarily, differences in the relative price of non-tradables tend to be attributable to differences in overall productivity, labor productivity being an important input. He also agrees with Balassa's argument that the difference in the relative price of non-perishable items is due to relative. Standard ADF tests may fail to reject the null hypothesis of a unit root in the real exchange rate.
As predicted, increases in the domestic relative price of non-tradable goods are associated with a significant appreciation of the real exchange rate (a decline in q.
ECONOMIC PROFILES: SOUTH AFRICA AND SWITZERLAND
Economic Profile: South Africa 55
In the early stages of the recovery, real gross domestic product growth accelerated sharply to 3. Due to the financial crisis in Southeast Asia in 1997, the South African economy was unable to take full advantage of the global economic expansion of the second half of the 1990s. 1998. The export sector expanded sharply, not because of any increase in productivity gains per se, but also because of the fall in the rand exchange rate.
Since the beginning of 2000, South Africa's monetary policy framework has been one of targeting the inflation rate (3%-6%).
Labour Productivity: South Africa 60
The average annual growth rate of real remuneration per worker was equal to 1.3 percent between 1989 and 1995. Growth in output per worker in the formal non-agricultural sectors of the economy reached 6.0 percent in 2000—the fastest rate high growth in the last thirty years. Overall, the growth of nominal remuneration per worker in the formal non-agricultural sectors of the economy slowed significantly during the period 1994-2003.
The year-on-year increase in the nominal salary per workers in the formal non-agricultural sectors of the economy accounted for 8.7 per cent. in 2003, a significant decrease from 13.1 per cent. in 1994.1.
![Table 4.1 CPIX 1 [%age change] versus Annual Salary Increases, 2000-2004 Year CPIX General Staff [Salary] Increases Differential](https://thumb-ap.123doks.com/thumbv2/pubpdfnet/10631615.0/71.892.143.696.323.555/table-annual-salary-increases-general-salary-increases-differential.webp)
Economic Profile: Switzerland 65
The structure of the Swiss economy underwent a significant change at the end of the 20th century. This significant change in weight in the economy has been mainly in favor of the services sector, accompanied by a decline in agriculture, construction and engineering. Traditionally important industries such as construction and engineering also declined, while most branches in the service sector continued to grow.
Further breakdown of the contribution of the service sector to the economy depicts the level of significance more deeply.
Labour Productivity: Switzerland 68
In the same way, one can also see the big difference in the inflation rates of the two countries. Consequently, the recovery of the Rand's exchange rate reduced the international competitiveness of South Africa's exports. This decrease in autocorrelation indicates that values further in the past are less correlated with the current value.
The taper of the autocorrelation indicates that the values further in the past are less correlated with the current value.
Economic Links: South Africa and Switzerland 71
Summary 76
It is important to note here that changes in inflation rates and exchange rates have affected the terms of trade. During the period under study, the terms of trade have turned out to be in favor of South Africa. Based on the current situation, this trend in terms of trade seems likely to continue in the near future.
In addition, the fact that the main trading partner of both countries is the European Union is reflected in the fluctuation of the external value of their currencies, as both currencies follow the euro.
EMPIRICAL METHODOLOGY AND MODEL SPECIFICATION
Data Description 77
Although such a measure of productivity is closest to the concept of productivity involved in the theoretical argument for the productivity bias, it is difficult to classify the economy of the two countries in such a uniform way. It is assumed that the higher the per capita income of a country, the higher the level of productivity it enjoys compared to other countries. The productivity of each country is calculated as the ratio of gross domestic product to employment in that country.
South Africa's GDP data is available on a quarterly basis in the International Monetary Fund's (IMF) Yearbook of International Financial Statistics (IFS).
Model Specification 80
Accordingly, the exchange rate of the monthly average rates aggregated into quarterly data will be used as a proxy for the exchange rate. Regarding the type of exchange rate to be used, Officer (1976a:36) argues that the exchange rate (R) used in the dependent variable must be the equilibrium value of the exchange rate, since the productivity bias refers to the relationship between PKM and the equilibrium exchange rate course. Therefore, the number 2.349 was taken as the equilibrium exchange rate (EQLRZA,CH) in the PKM calculation.
As in the case of level form, foreign exchange of monthly mid-rates which is the foreign exchange of monthly mid-rates aggregated in quarterly data will represent the variable exchange rate, but in index form.
Estimation and Inference Procedures for levels and indices 83
The third step is to test the stationarity of the residuals from the equation to ensure that νt. Estimating the equilibrium relationship is one, but by no means the only, part of the purpose of empirical model building. Finally, a unit root test on the residuals calculated based on the index form will be performed using the Durbin-Watson cointegrating regression test (CRDW), based on the Durbin-Watson statistic.
The analysis and interpretation that will be performed will be based on the results obtained from one of the most common statistical programs, the Statistical Package for the Social Sciences or SPSS.
Introduction 86
When dealing with the dependent variable, the PPP, the ratio between South Africa's GDP deflator and Switzerland's GDP deflator is assumed. It may also be important to point out here that the productivity index itself is the ratio between the GDP index and the employment index of the country in question. This (second) model therefore calculates the dependent variable (PPP/R) as the ratio between PPP and the exchange rate, with both the numerator and the denominator in index form.
The model calculates its independent variable, productivity, as the ratio of the productivity index in South Africa (ZA) to the productivity index in Switzerland (CH), both indices in constant prices (2000=100).
Tests for Stationarity: Based on Equilibrium Exchange Rate in level form 87
- Visual Inspection 88
- Sample Correlogram 90
- Dickey Fuller (DF) Test for Stationarity: Based on Equilibrium
- Dickey Fuller (DF) Test for PPP 92
- Dickey Fuller (DF) Test for Productivity 94
- Engle-Granger (EG) Test for Cointegration: Based on Equilibrium
- Error Correction Mechanism (ECM): Based on Equilibrium
Second, this chapter uses the index form in calculating PPP and productivity. Thus, the null hypothesis is not rejected due to the indication of the presence of non-stationarity. It can be concluded that the informal and formal tests for the stationarity of the PPP have similar outcome realizations.
As these results show, this quarter eliminates 0.186 of the variance between PKM and productivity variables in the previous quarter.
Tests for Stationarity: Based on GDP Deflator Index 102
- Visual Inspection 102
- Sample Correlogram 105
- Dickey Fuller (DF) Test for Stationarity: Based on GDP Deflator 105
- Dickey Fuller (DF) Test for Purchasing Power Parity (PPP) 105
- Dickey Fuller (DF) Test for Productivity 107
- Engle Granger (EG) Test for Cointegration
- Error Correction Mechanism (ECM): Based on GDP Deflator Index 111
- Cointegration Regression Durbin-Watson Test: Based on GDP Deflator 112
In the second scenario, where there is a constant but no trend, the critical values of 1, 5 and 10 percent, in absolute terms, exceed the calculated tau (τ) value -.2.236. In the third scenario where there is a constant and a trend, the critical values of 1, 5 and 10 percent, in absolute terms, exceed the calculated tau (τ) value -2.011. In the second scenario, where there is a constant but no trend, the critical values of 1, 5 and 10 percent, in absolute terms, exceed the calculated tau (τ) value -.2.016.
In the third scenario, where there is a constant and trend, the 1, 5 and 10 percent critical values in absolute numbers exceed the calculated tau (τ) value -1.657.
Summary 113
Based on the research conducted and the empirical results obtained therefrom, there is a case for the application of the productivity bias hypothesis (PBH) in the field of purchasing power parity (PPP). The real exchange rate or the deviation of the PPP from equilibrium is related to the ratio between productivity in South Africa and productivity in Switzerland. Although empirical results in some countries tend to differ based on model specification, sample size, data type, or level of economic development, the PBH test has enjoyed moderate empirical support for South Africa and Switzerland.
The real exchange rate and productivity variables in South Africa and Switzerland moved together indicating their long-run or equilibrium relationship during the study under consideration.
Recommendation 115
Finally, it may be worthwhile to more accurately assess the extent of the damage to the economy in general, and to productivity in particular, as well as the negative consequences of frequent strikes, protests and work stoppages. If this trend is reversed, the productivity of the economy in general and that of the manufacturing sector in particular will improve. As a result, this situation develops the potential, ceteris paribus, to reduce the productivity gap between South Africa and Switzerland.
These issues tend to be particularly important in light of increasing trade with old and new trading partners.
Possible Extension and Limitation of the Study 116
Relative Labor Productivity and the Real Exchange Rate in the Long Run: Evidence for Panel of OECD Countries.' Journal of International Economics. Exchange Rate Effects of Central Bank Interventions: An Analysis of Transaction Prices.’ The Economic Journal. Exchange rate determination: The role of factor price rigidities and non-tradables.’ Journal of International Economics.
Equilibrium exchange rate b/n SA and CH (Eqlrzach), gross domestic product in CH (gdpch), employment in CH (empch), GDP/employment ratio (gdpempch), productivity in CH(prodch) and productivity in SA (prodsa ).
