This paper revisits the exchange rate-fundamentals debate for the case of the South African Rand; emphasising the role of commodity prices. The exchange rate determination puzzle has been at the heart of exchange rate studies since the Meese-Rogoff (1983) seminal paper. We use floating nominal exchange rate data for South Africa and find evidence in support of a long-run relationship in the commodity-price augmented PPP and monetary models for South Africa. We demonstrate that inclusion of commodity prices improves the in-sample fit of canonical exchange rate model specifications. With respect to out-of-sample short-horizon forecasts, inclusion of commodity prices does improve accuracy although this result is not robust to model and horizon specification.

References are not ready for this file yet, please refer to reference from the PDF file

Keywords

Commodity prices, Exchange rates, Structural models