The effect of real exchange-rate volatility on income distribution in South Africa

Abstract

The study investigates the effect of real exchange rate volatility on the distribution of income between labour and capital in South Africa.  Both symmetric and asymmetric effects were considered. Using quarterly data from 1985:1 to 2018:3 and local linear projection method, we found that the immediate response of labour’s income share to a one standard deviation shock in exchange rate volatility is negative. Moreover, high exchange rate volatility impacts negatively on labour’s  income share while low exchange rate volatility impacts positively on labour income. As the magnitude of the effect of high exchange rate volatility is greater than that of low exchange rate volatility, the study documents evidence of an asymmetric effect. A shock increase in  some control variables (the real GDP, investment and openness) is followed immediately by a decline in labour income while an increase follows a positive shock in the relative price of investment. The policy implications of these findings are discussed.