Oil prices and exchange rates dynamics in South Africa.

Abstract

The study examines the dynamics between oil prices and exchange rates in an oil-importing country to guide policymakers in their decision making. Furthermore, findings from this study seeks to decision makers to make informed and effective control measures. For this reason, this paper studies the effect of oil prices and oil price volatility on the rand-to-dollar exchange rate. It uses South African monthly data from 2000: M1 to 2023: M12, accessed from the Federal Reserve Bank of St Louis (FRED) and the World Bank. It employs the Structural Vector Autoregressive (SVAR) Model and further computes impulse responses and the forecast error variance decomposition (FEVD). The main findings of the study show that South African nominal exchange rates respond asymmetrically to changes in oil prices and that they tend to respond more to negative oil price shocks. The response of the South African nominal effective exchange rate to oil prices contradicts several author’s work. The results further show that oil price volatilities cause the South African rand to depreciate.