Analysis Of The Determinants Of Exchange Rate Volatility In The SACU Region

Abstract

The currencies of the five SACU countries have experienced notable volatility in the last decade. The purpose of this study therefore, was to identify the determinants of exchange rate volatility in the SACU region and also to determine if there is a long run relationship between exchange rate volatility and its determinants. The study used annual time series data from 1980 to 2017. This study uses the generalised autoregressive conditional heteroscedasticity GARCH (1, 1) approach. The results from the study revealed that interest rates and inflation were both significant factors in explaining exchange rate volatility in Lesotho. Interest rates were also found to be a determinant of exchange rate volatility in Namibia. For South Africa, Swaziland and Botswana, inflation and interest rates were not significant in explaining exchange rate volatility. Policy makers in the region should therefore start considering the possibility of macro-economic policy independence going forward. In Lesotho, targeted inflation may go a long way in reducing exchange rate volatility. In Namibia and Lesotho, there is also room to explore the possibility of changing the interest rates time and again with the aim of reducing exchange rate volatility.