Alpanda, Sami, Kevin Kotzé, and Geoffrey Woglom, 2010, “The Role of the Exchange Rate in a New Keynesian DSGE Model for the South African Economy,” South African Journal of Economics, Vol. 78:2.
Bacchetta, Philippe, and Eric van Wincoop, 2009, “Infrequent Portfolio Decisions: A Solution to the Forward Discount Puzzle,” mimeo, February.
Bhundia, Ashok, and Jan Gottschalk, 2003, “Sources of Nominal Exchange Rate Fluctuations in South Africa,” Working Paper 03/252 (Washington: International Monetary Fund).
Cashin, Paul, Luis Céspedes, and Ratna Sahay, 2002, “Keynes, Cocoa, and Copper: In Search of Commodity Currencies,” Working Paper 02/223 (Washington: International Monetary Fund).
Cerra, Valerie, and Sweta Saxena, 2010, “The Monetary Model Strikes Back: Evidence from the World,” Journal of International Economics, Volume 81, pages 184–196.
Chinn, M., and G. Meredith, 2005, “Testing Uncovered Interest Parity at Short and Long Horizons During the post-Bretton Woods Era,” NBER Working Paper 11077 (Cambridge, Massachusetts: National Bureau of Economic Research).
Chinn, Menzie D., and Hiro Ito, 2006, “What Matters for Financial Development? Capital Controls, Institutions, and Interactions,” Journal of Development Economics, Volume 81, Issue 1, Pages 163–192.
Clark, Todd E., and Kenneth D. West, 2007, “Approximately Normal Tests for Equal Predictive Accuracy in Nested Models,” Journal of Econometrics, Vol. 138(1), pages 291–311.
Gebreselasie, Tewodros G., Olusegun A. Akanbi, and Moses M. Sichei, “Estimating an Econometric Model of the Rand-U.S. dollar Nominal Exchange Rate,” mimeo, University of Pretoria, 2005.
Lacerda, Miguel, Fedderke, Johannes, and Linda Haines, “Testing for Purchasing Power Parity and Uncovered Interest Parity in the Presence of Monetary and Exchange Rate Regime Shifts,” South African Journal of Economics, December 2010
Macdonald, Ronald, 2000, “Concepts to Calculate Equilibrium Exchange Rates: An Overview,” Discussion Paper, Economic Research Group, Deutsche Bundesbank.
Meese, Richard A., and Kenneth Rogoff, 1983, “Empirical Exchange Rate Models of the Seventies: Do they Fit out of Sample? Journal of International Economics, Vol. 14, pages 3–24.
Taylor, Alan M., and Mark P. Taylor, 2004, “The Purchasing Power Parity Debate,” The Journal of Economic Perspectives, Vol. 18, No.4, pages 135–158.
The country list includes The Gambia, Ghana, Kenya, Madagascar, Mozambique, Nigeria, Rwanda, Sierra Leone, South Africa, Tanzania, Uganda, Zambia. Although Malawi is classified as a floating exchange rate country by the IMF AREAER, it’s US dollar exchange rate has only experienced a few discrete jumps over the past decade and is therefore excluded from this analysis.
Chinn and Ito have derived their own capital account indicators based information from the annual IMF publication on capital account restrictions. Their index varies between -2 (least open) to 2.5 (most open) and is fairly closely correlated with the measure used in this paper although exceptions exist. For example, South Africa has a low openness index and reflects the fact that residents face limits on investing in equity and bonds abroad. Non-residents have no restrictions. Nevertheless these restrictions have been relaxed in recent years.
Many analysts have expressed the monetary model of the exchange rate in terms of differences in money stocks, interest rates and output and considerable empirical support has been found for these types of empirical models (see Cerra and Saxena 2010 for a recent example).
Clark and West derive a test based on the difference in the squared residual terms between the random walk and the specified model.