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Foreign Exchange Market Intervention in South Africa during the Asian Contagion: Leaning against the wind or causing a hurricane? |
A decision support service |
| Authors: E Schaling and C Schoeman Reviewed by: M K C Jackson | |
| Review : Research Paper Department of Economics, Rand Afrikaans University May 2000 | |
| The article examines whether the South African Reserve Bank could have acted more effectively to reduce the negative effects of the strong speculative pressures to which the rand was subjected from May to August 1998, following the Asian crisis. The rand lost around 20% of its value over this period, and domestic interest rates moved steeply upwards resulting in a peak prime overdraft rate of 25.5%. The SA Reserve Bank engaged in large market intervention in the exchange market in its attempt to defend the value of the rand at the beginning of the period. It is estimated to have spent at least $2bn for this purpose. It subsequently moved the repo rate up tentatively, then more strongly, but sought to move it downwards from what it considered high levels within days of the increases. The authors examine these actions against the framework of current literature on currency crises. They conclude that the SARB policy measures were virtually the opposite of those implied as appropriate in accordance with the current literature. Their conclusion is that more appropriate policy measures could have reduced the degree to which the value of the rand depreciated, and could have avoided the very high real interest rate levels which pushed the South African economy into recessionary conditions in the latter half of 1998. | |
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| econometrix | 01-Mar-04 | ||