The Effect of Exchange Rate Volatility on Trade between South Africa and her Top Trading Partners: Fresh Insights from ARDL and Quantile ARDL Models

Abstract

We investigate the impact of exchange rate volatility on exports and imports between South Africa and its main trading partners, namely the United States and China, across 22 import and export industries. The study employs the quantile autoregressive distributive lag (QARDL) model using quarterly data from the period spanning from 1994Q1 to 2022Q4. Our initial ARDL estimates establish that currency volatility does not significantly harm most trade sectors with both countries. In fact, many industries exhibit an insignificant or positive correlation with currency volatility. Nevertheless, upon re-estimating the regressions using the QARDL model, we uncover ‘hidden cointegration’ relationships existing at quantiles beyond the mean and median estimates, which are undetectableby traditional ARDL models. By considering these location-based asymmetries, we conclude that trade activities with China benefit more from exchange rate volatility compared to those with the United States. Overall, our findings imply that monetary authorities may not need to intervene in currency markets to stimulate trade with the top trading partners, as firms appear to be willing to bear the currency risks associated with the volatile Rand exchange rate.