The purpose of this paper is to undertake an econometric investigation of the determinants of the nominal South African rand/US dollar exchange rate before and after the country's financial liberalisation in March 1995.
Regression models are used to examine the changing relationships between the nominal rand/dollar exchange rate and the determinants of capital flows, fundamentals, and country‐specific factors over the long‐run of 1988 to 2007, as well as over the sub‐sample periods of 1988 to 1995, and 1995 to 2007.
The results show that the factors that are associated with the rand/dollar exchange rate are different before and after the country's financial liberalisation. Prior to 1995, bond and equity purchases by non‐residents, the long‐term interest rate differential, political risk, and the Dollar price of gold were highly significant. However, post‐1995, only the net purchases of shares on the Johannesburg stock exchange (JSE) by non‐residents and the long‐term interest rate differential are significant.
The results suggest that the Rand has changed from being a “commodity currency” in the years before 1995 to being an “equity currency” after 1995.
