South Africa, The Impact Of Exchange Rate Changes On Import Prices And Cpi Fluctuations

A highly volatile exchange rate regime in the fast-integrating world is a threat to the maintenance of price stability by monetary authorities. This paper investigated the extent of the pass-through of the exchange rate to import prices in South Africa between 1995 and 2007.The Johansen cointegration approach, which was applied on the quarterly series to derive the long-run pass-through relationship, provided strong evidence for the existence of a very high exchange rate pass-through, implying a depreciation of the rand would increase the domestic price of imports by at least an amount of the depreciation in the long-run. The short-run dynamics of the exchange rate pass-through, captured by the ECM, also showed a quite high, but incomplete pass-through of the exchange rate, with the adjustment of the import prices towards the long-run equilibrium quite fast. The high magnitude of the exchange rate pass-through results are consistent with the assumption and experiences of small, open economies, and might also be in part a consequence of low pricing-to-market (PTM) effects. Lastly, evidence from the estimated impulse response functions (IRF) and variance decomposition (FEVD) for the Consumer price index (CPIX) indicated a significant, but incomplete and relatively low exchange rate pass-through.