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The purpose of this paper is to uncover the channels through which real exchange rate undervaluation influences the performance of the South African economy.

The author decomposes the South African economy into three sectors: agriculture, industry, and services. Specifying a model for each sector, the author employs the ordinary least squares (with Newey-West and robust standard errors) and generalized method of moments estimation techniques. The annual time series data cover the period 1962-2014.

The author finds that real exchange rate undervaluation exerted a positive influence on agriculture and industry, and a negative impact on services.

The results have practical policy implications, which are discussed in the paper.

Although the growth effect of real exchange rate undervaluation has been well established in the literature, the channels through which this occurs has received limited attention. Prior to this study, no study has considered the impact of real exchange rate undervaluation on the economy through the various sectors in the South African context.

This paper aims to examine the effects of exchange rate volatility on consumption by focusing on a small open sub-Saharan Africa (SSA) country, Ghana, which has experienced exchange rate volatility frequently.

The authors used annual data covering the period 1980-2015, the annualised variance of the real exchange rate as a measure of exchange rate volatility and a technique that is able to separate short-run effects from long-run effects.

The authors found that exchange rate volatility has negative effects on domestic consumption in the short run, which is passed on as negative long-run effects. This conclusion is unaffected by an alternative measure of exchange rate volatility and the choice of lag restrictions.

The authors’ finding suggests that policymakers should seek to reduce or prevent exchange rate volatility by pursuing various policies including limiting foreign currency transactions within the country and promoting quality exports.

The extant studies have examined the effects of exchange rate volatility on consumption by considering countries in regions other than SSA. This paper focuses on a small open SSA country which has experienced exchange rate volatility frequently. Unlike most studies, this paper differentiates short-run effects from long-run effects.

This paper aims to provide a comprehensive review of the literature on the determinants of stock market development.

The paper divides the existing studies into the theoretical and empirical literature. Then, it analyses these studies in turn.

Based on the theoretical literature, the determinants of stock market development can be broadly classified into two groups: macroeconomic factors and institutional factors. The theory and the empirics predict different ways in which macroeconomic factors affect stock market development. The real income and its growth rate foster stock market development, while the banking sector, interest rate and private capital flows can foster or inhibit it. Inflation and exchange rates have adverse effects on stock market development. In terms of the institutional factors, the literature indicates that different legal origins and stock market integration can have a positive or negative impact on stock market development. In addition, factors such as legal protection of investors, corporate governance, financial liberalisation and trade openness contribute positively to the development of the stock market.

From the survey, it is imperative that policies which aim at enhancing institutional quality, financial integration, real income growth, macroeconomic stability and capital inflows, among others, will certainly promote stock market development within and across countries. Although the empirical studies have incorporated a large set of variables in their models, the theoretical studies do not contain rich models of stock market development. It is understandable that a theoretical model which contains a large set of the determinants of stock market development may be difficult to solve. However, such a model seems very appealing and will provide a unification of the existing literature.

The originality of the paper lies in the fact that it is the first to undertake a survey of the determinants of stock market development in the literature. It is hoped that this paper will spur further theoretical and empirical research on the determinants of stock market development.

This paper aims to assess the effects of housing market shocks on real output in South Africa, by focusing on the real private consumption channel.

It measures housing market shocks as non-monetary housing shocks, uses a data set covering the period 1969Q4-2014Q4 and uses the agnostic identification procedure.

The paper finds that 20 per cent of the variation in house prices is explained by these shocks. The paper also finds that the effects of housing demand shocks on real private consumption are short-lived and generate a transitory real output response. Overall, housing demand shocks have managed to explain nearly 13 per cent and 14 per cent of the variation in real private consumption and real output respectively, over 20-quarters ahead forecast revision.

This finding suggests that shocks emanating from the housing market in the country are essential and should be considered when making macroeconomic policy decisions.

None of the existing studies, to our knowledge, have empirically assessed the effects of housing market shocks on real output directly. This paper attempts to contribute to the literature by assessing the direct impact of housing market shocks on the real output, using South Africa as a case study.

The purpose of this paper is to examine the validity of the purchasing power parity (PPP) hypothesis for two Southern African countries, namely: Lesotho and Zambia.

The authors utilized four econometric tests to examine the existence of the PPP hypothesis in Lesotho and Zambia. These tests include two unit root tests without structural breaks – the Dickey-Fuller generalized least squares (DF-GLS) test and the Ng-Perron test; and two unit root tests with structural breaks – the Perron test and the Zivot-Andrews test. The authors’ empirical analysis is based on an annual data set with varying time periods. The sample period spanned 1960-2010 and 1955-2010, for Lesotho and Zambia, respectively.

The authors found that the PPP hypothesis was supported in the case of Lesotho, but rejected in the case of Zambia.

This paper is the first to simultaneously explore the exchange rate policies, trends, and the PPP for these two countries. The implication of this finding is that Lesotho is unlikely to profit immensely from trade and investment arbitrages; whereas Zambia is more likely to profit immensely from trade and investment arbitrage by trading with the USA. Moreover, the authors’ findings indicate that the PPP doctrine may be a useful guide for the exchange rate and other macroeconomic adjustment policies in Lesotho but not in Zambia.

The purpose of this paper is to examine whether the purchasing power parity (PPP) holds for countries in the West African Monetary Zone (WAMZ).

The author uses time series and panel data techniques.

Overall, the evidence is inconclusive. The time series and panel unit root tests rejected the PPP. The time series cointegration test supported it. The panel cointegration tests are, however, inconclusive.

The inconclusive evidence implies that the appropriateness of the PPP-based policies which have been implemented in the WAMZ may be difficult to assess. Moreover, the question of whether the WAMZ agenda may face trade obstacles is still widely open. Perhaps fractional unit root and cointegration techniques may help pin down conclusive evidence. Future studies may consider this direction.

The paper is original in the sense that it is the first to utilize a mixture of time series and panel data techniques to examine the PPP hypothesis for these countries.

The purpose of this paper is to explore the landscape of financial services in Africa through the prism of a selection of research papers.

This is a review of literature that focusses on access to financial services (i.e. financial inclusion) and empirical findings from research papers in this issue of the journal.

The landscape of financial services in Africa is as heterogeneous as the countries comprising the continent. Common features include low levels of financial inclusion, low financial literacy, constrained access to credit, costly credit when available, gender discrimination in account ownership, and use and inefficient foreign exchange markets. Nevertheless, there are promising innovations, especially the mobile money innovation, which have the potential to foster more inclusive financial systems.

All the papers in this volume are based on original research shedding new insights on various aspects of financial services in Africa.