Author(s): Nemushungwa Azwifaneli Innocentia, Mudau Maria Phathutshedzo
The determinants of exchange rate volatility continue to be a contentious topic in international economics, with no clear consensus due to the use of diverse theoretical models. This study revisits the New Open Economy Macroeconomics (NOEM) hypothesis to provide fresh insights into the drivers of exchange rate volatility in South Africa over the period 1990–2023. Employing quarterly data and the nonlinear autoregressive distributed lag (NARDL) framework, the study leverages the NOEM model’s ability to integrate both monetary and non-monetary factors—a particularly relevant feature given South Africa’s post-1995 trade liberalisation and increasing global economic integration.The NARDL approach enables the analysis of asymmetric responses of exchange rate volatility to positive and negative shocks in key macroeconomic variables, including oil prices, inflation, trade openness, interest rates, and GDP. The results reveal pronounced short- and long-run asymmetries. In the short run, negative oil price shocks amplify volatility, whereas positive shocks are largely inconsequential. GDP fluctuations display nuanced effects, with both positive and negative changes contributing to volatility reduction. Increases in trade openness significantly lower volatility, while reductions exacerbate instability. Inflation exerts long-run asymmetric effects, with positive shocks driving higher volatility. Interest rates, in contrast, remain largely insignificant across both horizons. The error correction term suggests that approximately 16% of disequilibria are corrected annually, confirming a gradual adjustment toward equilibrium.By revisiting the NOEM framework, this study underscores the necessity of incorporating asymmetries into exchange rate modelling and policy formulation. It makes a distinct contribution to the limited South African literature by demonstrating how oil price shocks, inflation, and trade openness asymmetrically influence rand volatility. Policy recommendations arising from these findings include strengthening trade openness, diversifying the economy, refining inflation-targeting mechanisms, and implementing measures to mitigate the impact of adverse oil price shocks.