## _wp03252 - References

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---

### Introduction — key facts and context
- Exchange rate movement:
  - The South African rand depreciated sharply against the U.S. dollar in the last four months of 2001—by 42 percent between September and December—after a steady decline earlier in the year.
- Policy and public reaction:
  - The unexpected depreciation in the final months of 2001 led to widespread public concern and the South African Reserve Bank was faced with the prospect of a significant increase in inflation.
  - Some policymakers voiced beliefs that the marked acceleration in the rate of depreciation was not justified by economic fundamentals and may have been caused by speculators taking short positions against the rand.
- Myburgh Commission of Inquiry:
  - The President of South Africa set up the Myburgh Commission of Inquiry to investigate the causes of the depreciation in 2001, including whether there was any evidence that capital control regulations had been violated.
  - The Myburgh Commission released its final report on August 2002 which pointed to several macroeconomic factors behind the depreciation.
- Myburgh Commission cited chief explanations for the rand depreciation up to October:
  - (i) a continued slowdown in global economic activity,
  - (ii) contagion from events in Argentina,
  - (iii) a worsening in the current account balance in the fourth quarter of 2001, and
  - (iv) complete shift from a surplus in the financial account of the balance of payments in the third quarter to a deficit in the fourth quarter.

### II. The Myburgh Commission findings (background)
- Key macroeconomic factors identified as contributors to the rand depreciation in 2001:
  - Slowdown in global economic activity reducing foreign currency availability in the rand market and reducing capital inflows to emerging markets.
  - Financial market developments, including the deepening crisis in Argentina and events in Zimbabwe, raising global risk aversion toward emerging markets.
  - The South African Reserve Bank’s policy of nonintervention (reducing its net open foreign position) may have created the impression that the rand was a “one way bet.”
- The Commission noted the current account moved into deficit and the financial account moved into deficit in the last quarter of 2001, but conceded that the acceleration of depreciation in that quarter “remains difficult to explain.”

### III. Framework (theoretical model and identification)
- Empirical strategy:
  - Follows Clarida and Gali (1994): a stochastic two-country Dornbusch-style model combined with SVAR identification.
- Structural disturbances modeled:
  - Aggregate supply disturbance (e.g., increase in productivity).
  - Real demand disturbance (e.g., change in government spending).
  - Nominal disturbance (e.g., monetary policy actions, money-demand shifts, financial market developments/contagion).
- Long-run theoretical restrictions:
  - Nominal disturbances have no long-run effects on output.
  - Nominal disturbances have no long-run effects on the real exchange rate.
  - Real demand disturbances have no long-run effect on output.
- Variables used (relative S.A. vis-à-vis U.S., all in logarithms): relative output (SA minus U.S.), relative price level (SA versus U.S.), real exchange rate (rand–U.S. dollar adjusted for relative prices).
- Identification:
  - Blanchard and Quah (1989) long-run restrictions imposed on reduced-form VAR residuals to interpret residuals as aggregate supply, real demand, and nominal disturbances.

### IV. Data, sample, and estimation details
- Sample period: first quarter of 1985 until the second quarter of 2002.
- Time-series properties:
  - Augmented Dickey Fuller tests: all three variables found to be I(1).
  - Johansen rank test: presence of one cointegration vector between relative output and price, but cointegration vector unstable; VAR estimated in first differences.
- VAR specification:
  - Lag length: information criteria indicate one lag sufficient, but lag length increased to three to obtain white noise residuals.
  - Variables are in first differences; impulse responses accumulated to obtain level responses over 20 quarters.

### V. Impulse response analysis — qualitative dynamics
- Supply disturbance (scaled so output rises 1 percent on impact):
  - Output: increase in SA relative to U.S.
  - Relative price level: decline in SA relative price level.
  - Real exchange rate: slight initial appreciation, then pronounced persistent depreciation (long-run predicted).
  - Nominal exchange rate: depreciates in the long run, but by less than the real exchange rate because of negative price response.
- Real demand disturbance (scaled to raise output 1 percent on impact):
  - Output: increase on impact; long-run output response restricted to zero.
  - Price level: increase; very persistent.
  - Real and nominal exchange rates: appreciation initially; persistent effects.
- Nominal disturbance (scaled to raise output 1 percent on impact):
  - Output: transitory effect lasting about a year.
  - Price level: persistent increase.
  - Real and nominal exchange rates: large depreciation on impact; nominal exchange rate overshoots long-run level; long-run real exchange rate effect restricted to zero.

### VI. Variance decomposition for the nominal (rand–U.S. dollar) exchange rate (Table 1)
- Decomposition (In Percent) — contributions to variance of nominal exchange rate:
  - Horizon 0: Aggregate Supply Shock 3.0; Real Demand Shock 9.5; Monetary Policy Shock 87.5
  - Horizon 4: Aggregate Supply Shock 6.8; Real Demand Shock 33.5; Monetary Policy Shock 59.7
  - Horizon 8: Aggregate Supply Shock 15.5; Real Demand Shock 51.4; Monetary Policy Shock 33.1
  - Horizon 12: Aggregate Supply Shock 20.1; Real Demand Shock 58.6; Monetary Policy Shock 21.3
  - Horizon 20: Aggregate Supply Shock 24.1; Real Demand Shock 63.5; Monetary Policy Shock 12.4
  - Horizon 40: Aggregate Supply Shock 26.7; Real Demand Shock 66.3; Monetary Policy Shock 7.0
- Interpretation:
  - Impact (short-run): unexpected changes in the nominal exchange rate are almost entirely due to nominal disturbances.
  - One-year horizon: nominal disturbances account for about 60 percent of variance.
  - Two-year horizon: nominal disturbances fall to about one-third; real demand disturbances dominate.
  - Long-run: aggregate supply and real demand disturbances dominate; nominal disturbances’ role declines substantially.

### VII. Sources of the 2001 depreciation (historical decomposition and timing)
- Forecast performance and surprise depreciation:
  - Annual-change forecast errors remain below 5 percent until 2001: Q3; the sharp depreciation in 2001: Q4 produced a very large forecast error (unexpected).
- Historical decomposition (annual change, j = 4) for 2001:Q1–2002:Q2:
  - Almost all of the unexpected depreciation in 2001:Q4 and 2002:Q1 is attributed to nominal disturbances occurring in those quarters.
  - Impulse response evidence: effects of nominal disturbances dissipate relatively quickly; after two quarters about half of the initial effect has dissipated.
  - Long-run model implication: two-thirds of the initial nominal depreciation will be reversed; no long-run effects on the real exchange rate.
- Conclusion from decomposition:
  - Real-sector factors (e.g., global economic slowdown) are unlikely to explain the year-end 2001 sharp depreciation because timing does not coincide.
  - The primitive force most responsible for the depreciation in 2001:Q4–2002:Q1 is nominal disturbances.

### VIII. Identifying the origin and nature of the nominal disturbances
- Geographic origin (evidence from nominal effective exchange rates):
  - The U.S. dollar NEER remained broadly constant during 2001 and H1 2002.
  - The rand NEER depreciated sharply over the same period.
  - Inferential conclusion: the nominal disturbance originated in the South African economy (rand lost value), not in a U.S. dollar-wide appreciation.
- Monetary policy as candidate:
  - Short-term interest rate evidence:
    - During 2001, the South African treasury bill rate edged lower by about 100 basis points.
    - The three-month treasury bill rate in the U.S. fell by just over 4 percentage points, reflecting a Federal Reserve easing of 450 basis points.
    - Conclusion from relative interest rates: SARB policy stance tightened relative to the Federal Reserve during 2001.
  - Monetary aggregates evidence:
    - Strong evidence of an acceleration in money growth in 2001 (six-month growth rates plotted for M1A and M2).
    - Acceleration in money growth could reflect either money demand or money supply increases.
    - In 1999, rapid money aggregate growth was accompanied by exchange rate stability (suggesting demand-led expansion). In 2001, acceleration in money growth coincided with significant exchange rate depreciation and increased inflation — both indicating an acceleration in money supply.
  - Contradiction: interest-rate indicators suggest relative tightening, monetary-aggregate indicators suggest expansionary pressures — conflicting signals.
  - Estimating a SARB policy reaction function could help identify surprise monetary easings, but frequent structural breaks in South Africa’s monetary framework make estimation of a stable reaction function beyond the scope of the paper.
- Financial market developments as candidate:
  - Given that real factors are unlikely and monetary indicators are contradictory, financial market developments remain the most plausible source.
  - Myburgh Commission suggested contagion and currency speculation but could not establish these as sufficient explanations; timing again problematic because Argentina/Zimbabwe crises predated the rand depreciation.
  - The exact “smoking gun” remains unidentified; the paper suggests analysis extension to other financial market variables (beyond scope of present paper).

### IX. Policy implications and conclusion
- Main empirical conclusion:
  - The large depreciation in 2001:Q4–2002:Q1 was driven predominantly by nominal disturbances originating in South Africa; financial market developments are the most likely proximate source, though the precise cause is unclear.
- Policy-relevant findings:
  - Preliminary examination of relative policy interest rates suggests monetary policy did not directly cause the depreciation.
  - Monetary policy could, in principle, be effective in influencing the nominal exchange rate (impulse response evidence), but “leaning against” depreciation would have required substantial tightening.
  - It is unclear whether such tightening would have been appropriate amid slowing growth and muted inflationary pressures.
  - Because nominal disturbances have no long-run effects on the real exchange rate in the model, the real effects of the depreciation are likely short lived — reducing the case for strong exchange-rate interventions.
- Suggested further research:
  - Extend analysis to other financial market variables to identify more precisely the financial-market sources of the nominal disturbances.

*Source: Author’s model estimates and analysis as presented in the content unit.*

### References..............................................................................................................

### _wp03252 - References..............................................................................................................

### Figures and Tables
- Figures listed in the content:
  - 1. Impulse Response Functions for the Aggregate Supply Shock
  - 2. Impulse Response Functions for the Real Demand Shock
  - 3. Impulse Response Functions for the Nominal Shock
  - 4. Actual and Projected Annual Change in the Nominal Exchange Rate
  - 5. Historical Decomposition of the Nominal Exchange Rate
  - 6. Nominal Effective Exchange Rates for the Rand and the U.S. Dollar
  - 7. Relative Monetary Policy Stance in South Africa: Discount Rate and Treasury Bill Rate Differential vis-à-vis the United States.
  - 8. Monetary Aggregates and the Rand Exchange Rate
- Table listed:
  - 1. Various Decomposition of the Nominal Exchange Rate

### Appendix
- Appendix Figure:
  - A1. Time-Series Plot
- Appendix Tables:
  - A1. Time-Series Properties of Data
  - A2. Misspecification Tests

### Introduction — key facts and context
- Exchange rate movement:
  - The South African rand depreciated sharply against the U.S. dollar in the last four months of 2001—by 42 percent between September and December—after a steady decline earlier in the year.
- Policy and public reaction:
  - The unexpected depreciation in the final months of 2001 led to widespread public concern, and the South African Reserve Bank was faced with the prospect of a significant increase in inflation.
  - Some policymakers voiced beliefs that the marked acceleration in the rate of depreciation was not justified by economic fundamentals and may have been caused by speculators taking short positions against the rand.
- Myburgh Commission of Inquiry:
  - The President of South Africa responded by setting up the Myburgh Commission of Inquiry, mandating it to investigate the causes of the depreciation in 2001, including whether there was any evidence that capital control regulations had been violated.
  - The Myburgh Commission released its final report on August 2002 which pointed to several macroeconomic factors behind the depreciation.
- Myburgh Commission cited chief explanations for the rand depreciation up to October:
  - (i) a continued slowdown in global economic activity,
  - (ii) contagion from events in Argentina,
  - (iii) a worsening in the current account balance in the fourth quarter of 2001, and
  - (iv) complete shift from a surplus in the financial account of the balance of payments in the third quarter to a deficit in the fourth quarter

* _wp03252 - References.............................................................................................................. *

### 2001. The Commission, however, was unable to explain the acceleration of the depreciation in

### The Commission, however, was unable to explain the acceleration of the depreciation in

### II. The Myburgh Commission findings (background)
- Key macroeconomic factors identified as contributors to the rand depreciation in 2001:
  - Slowdown in global economic activity reducing foreign currency availability in the rand market and reducing capital inflows to emerging markets.
  - Financial market developments, including the deepening crisis in Argentina and events in Zimbabwe, raising global risk aversion toward emerging markets.
  - The South African Reserve Bank’s policy of nonintervention (reducing its net open foreign position) may have created the impression that the rand was a “one way bet.”
- The Commission noted the current account moved into deficit and the financial account moved into deficit in the last quarter of 2001, but conceded that the acceleration of depreciation in that quarter “remains difficult to explain.”

### III. Framework (theoretical model and identification)
- The empirical strategy follows Clarida and Gali (1994): a stochastic two-country Dornbusch-style model combined with SVAR identification.
- Structural disturbances modeled:
  - Aggregate supply disturbance (e.g., increase in productivity).
  - Real demand disturbance (e.g., change in government spending).
  - Nominal disturbance (e.g., monetary policy actions, money-demand shifts, financial market developments/contagion).
- Long-run theoretical restrictions (from the model):
  - Nominal disturbances have no long-run effects on output.
  - Nominal disturbances have no long-run effects on the real exchange rate.
  - Real demand disturbances have no long-run effect on output.
- Variables used (relative S.A. vis-à-vis U.S., all in logarithms): relative output (SA minus U.S.), relative price level (SA versus U.S.), real exchange rate (rand–U.S. dollar adjusted for relative prices).
- Identification via Blanchard and Quah (1989) long-run restrictions imposed on reduced-form VAR residuals to interpret residuals as aggregate supply, real demand, and nominal disturbances.

### IV. Data, sample, and estimation details
- Sample period: first quarter of 1985 until the second quarter of 2002.
- Time-series properties:
  - Augmented Dickey Fuller tests: all three variables found to be I(1).
  - Johansen rank test: presence of one cointegration vector between relative output and price, but cointegration vector unstable; VAR estimated in first differences.
- VAR lag length: information criteria indicate one lag sufficient, but lag length increased to three to obtain white noise residuals.
- Variables are in first differences; impulse responses accumulated to obtain level responses over 20 quarters.

### V. Impulse response analysis — qualitative dynamics
- Supply disturbance (scaled so output rises 1 percent on impact):
  - Output: increase in SA relative to U.S.
  - Relative price level: decline in SA relative price level.
  - Real exchange rate: slight initial appreciation, then pronounced persistent depreciation (long-run predicted).
  - Nominal exchange rate: depreciates in the long run, but by less than the real exchange rate because of negative price response.
- Real demand disturbance (scaled to raise output 1 percent on impact):
  - Output: increase on impact; long-run output response restricted to zero.
  - Price level: increase; very persistent.
  - Real and nominal exchange rates: appreciation initially; persistent effects.
- Nominal disturbance (scaled to raise output 1 percent on impact):
  - Output: transitory effect lasting about a year.
  - Price level: persistent increase.
  - Real and nominal exchange rates: large depreciation on impact; nominal exchange rate overshoots long-run level; long-run real exchange rate effect restricted to zero.

### VI. Variance decomposition for the nominal (rand–U.S. dollar) exchange rate (Table 1)
- Decomposition (In Percent) — contributions to variance of nominal exchange rate:
  - Horizon 0: Aggregate Supply Shock 3.0; Real Demand Shock 9.5; Monetary Policy Shock 87.5
  - Horizon 4: Aggregate Supply Shock 6.8; Real Demand Shock 33.5; Monetary Policy Shock 59.7
  - Horizon 8: Aggregate Supply Shock 15.5; Real Demand Shock 51.4; Monetary Policy Shock 33.1
  - Horizon 12: Aggregate Supply Shock 20.1; Real Demand Shock 58.6; Monetary Policy Shock 21.3
  - Horizon 20: Aggregate Supply Shock 24.1; Real Demand Shock 63.5; Monetary Policy Shock 12.4
  - Horizon 40: Aggregate Supply Shock 26.7; Real Demand Shock 66.3; Monetary Policy Shock 7.0
- Interpretation:
  - Short-run (impact): unexpected changes in the nominal exchange rate are almost entirely due to nominal disturbances.
  - One-year horizon: nominal disturbances account for about 60 percent of variance.
  - Two-year horizon: nominal disturbances fall to about one-third; real demand disturbances dominate.
  - Long-run: aggregate supply and real demand disturbances dominate; nominal disturbances’ role declines substantially.

### VII. Sources of the 2001 depreciation (historical decomposition and timing)
- Forecast performance and surprise depreciation:
  - Annual-change forecast errors remain below 5 percent until 2001: Q3; the sharp depreciation in 2001: Q4 produced a very large forecast error (unexpected).
- Historical decomposition (annual change, j = 4) for 2001:Q1–2002:Q2:
  - Almost all of the unexpected depreciation in 2001:Q4 and 2002:Q1 is attributed to nominal disturbances occurring in those quarters.
  - Impulse response evidence: effects of nominal disturbances dissipate relatively quickly; after two quarters about half of the initial effect has dissipated.
  - Long-run model implication: two-thirds of the initial nominal depreciation will be reversed; no long-run effects on the real exchange rate.
- Conclusion from decomposition:
  - Real-sector factors (e.g., global economic slowdown) are unlikely to explain the year-end 2001 sharp depreciation because timing does not coincide.
  - The primitive force most responsible for the depreciation in 2001:Q4–2002:Q1 is nominal disturbances.

### VIII. Identifying the origin and nature of the nominal disturbances
- Geographic origin (evidence from nominal effective exchange rates):
  - The U.S. dollar NEER remained broadly constant during 2001 and H1 2002.
  - The rand NEER depreciated sharply over the same period.
  - Inferential conclusion: the nominal disturbance originated in the South African economy (rand lost value), not in a U.S. dollar-wide appreciation.
- Monetary policy as candidate:
  - Short-term interest rate evidence:
    - During 2001, the South African treasury bill rate edged lower by about 100 basis points.
    - The three-month treasury bill rate in the U.S. fell by just over 4 percentage points, reflecting a Federal Reserve easing of 450 basis points.
    - Conclusion from relative interest rates: SARB policy stance tightened relative to the Federal Reserve during 2001.
  - Monetary aggregates evidence:
    - Strong evidence of an acceleration in money growth in 2001 (six-month growth rates plotted for M1A and M2).
    - Acceleration in money growth could reflect either money demand or money supply increases.
    - In 1999, rapid money aggregate growth was accompanied by exchange rate stability (suggesting demand-led expansion). In 2001, acceleration in money growth coincided with significant exchange rate depreciation and increased inflation — both indicating an acceleration in money supply.
  - Contradiction: interest-rate indicators suggest relative tightening, monetary-aggregate indicators suggest expansionary pressures — conflicting signals.
  - Estimating a SARB policy reaction function could help identify surprise monetary easings, but frequent structural breaks in South Africa’s monetary framework make estimation of a stable reaction function beyond the scope of the paper.
- Financial market developments as candidate:
  - Given that real factors are unlikely and monetary indicators are contradictory, financial market developments remain the most plausible source.
  - Myburgh Commission suggested contagion and currency speculation but could not establish these as sufficient explanations; timing again problematic because Argentina/Zimbabwe crises predated the rand depreciation.
  - The exact “smoking gun” remains unidentified; the paper suggests analysis extension to other financial market variables (beyond scope of present paper).

### IX. Policy implications and conclusion
- Main empirical conclusion:
  - The large depreciation in 2001:Q4–2002:Q1 was driven predominantly by nominal disturbances originating in South Africa; financial market developments are the most likely proximate source, though the precise cause is unclear.
- Policy-relevant findings:
  - Preliminary examination of relative policy interest rates suggests monetary policy did not directly cause the depreciation.
  - Monetary policy could, in principle, be effective in influencing the nominal exchange rate (impulse response evidence), but “leaning against” depreciation would have required substantial tightening.
  - It is unclear whether such tightening would have been appropriate amid slowing growth and muted inflationary pressures.
  - Because nominal disturbances have no long-run effects on the real exchange rate in the model, the real effects of the depreciation are likely short lived — reducing the case for strong exchange-rate interventions.
- Suggested further research:
  - Extend analysis to other financial market variables to identify more precisely the financial-market sources of the nominal disturbances.

*Source: Author’s model estimates and analysis as presented in the content unit.*

---


_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2003/_wp03252.pdf_