A PANEL DATA APPROACH TO THE BEHAVIOURAL EQUILIBRIUM EXCHANGE RATE OF THE ZAR

The question of currency over- or undervaluation is often asked and implies the existence of an equilibrium exchange rate (EER). The aim of this research was to determine the long-term EER of the South African rand using the behavioural equilibrium exchange rate (BEER) methodology. This paper used a panel of data from South Africa's main trading partners to estimate the relationship between the EER and its fundamental determinants using dynamic ordinary least squares (OLS) and fully modified OLS. The average coefficients obtained describe the long-term behaviour of the individual countries' real exchange rates. Substituting the observed fundamental time series into the estimated equation derives the EER for each country and over- and undervaluation can be determined. The results indicated that the fundamental value of the exchange rate was driven by economic growth, the openness of the economy, its foreign reserves, the real gold price and capital expenditure. The exchange rate also fluctuated considerably around its equilibrium level but there is not long sustained periods of over- and undervaluation.