The nominal rand/dollar exchange rate: before and after 1995

Purpose – 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. Design/methodology/approach – 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. Findings – 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. Originality/value – 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. JEL classification: F31, F32, F36