Testing for explosive bubbles in the South African-US exchange rate using the sequential ADF procedures

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This paper tests for the existence of speculative bubbles in the South African-US exchange rate using the sequential ADF procedures. In particular, the paper uses the SADF and GSADF right-tailed unit root tests to explore the existence of explosive bubbles in the South African-US exchange rate for the time period running from January1980 through July 2012. The results provide evidence in support of the existence of explosive bubbles in the nominal rand-dollar exchange rate, the real exchange rate of traded and non-traded goods. The explosive behavior exhibited by the South African rand-US dollar exchange rate can be interpreted as evidence of rational bubbles given that this behavior is driven by the fundamentals including relative prices of traded and non-traded goods.

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    • Fig. 1. SADF test for nominal rand-dollar exchange rate
    • Fig. 2. SADF test for real exchange rate of non-traded goods
    • Fig. 3. SADF test for real exchange rate of traded goods
    • Table 1. Descriptive statistics
    • Table 2. The ADF, SADF, RADF and GSADF tests for nominal exchange rate
    • Table 3. The ADF, SADF, RADF and GSADF tests for exchange rate-relative price of nontraded goods ratio
    • Table 4. The ADF, SADF, RADF and GSADF tests for exchange rate-relative price of traded goods ratio