This paper presents a discussion on the volatility of the South African exchange rate, its relationship to capital ‡ows, and the cur- rency carry trade; and on the channels through which (potentially destabilizing) carry in‡ows can erode the e¤ectiveness and indepen- dence of monetary policy. I note the di¤erent consequences of short and long-term currency volatility; the bene…ts from a moderate degree of short-term volatility; the scope for foreign exchange reserve accu- mulation (and other prudential tools); and argue that low and stable in‡ation serves a counter-speculative role –by permitting low nominal interest rates, which reduce the currency’s speculative appeal, without the repression of negative real interest rates. Low interest di¤eren- tials are also associated (cross sectionally) with lower exchange rate volatility.
CITATION STYLE
Hassan, S. (2016). Speculative Capital Flows, Exchange Rate Volatility and Monetary Policy: South African Experience. In Contemporary Issues in Development Economics (pp. 136–162). Palgrave Macmillan UK. https://doi.org/10.1057/9781137529749_9
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