Real exchange rate undervaluation and sectoral growth in South Africa

Purpose The purpose of this paper is to establish the empirical link between real exchange rate (RER) undervaluation and sectoral growth in South Africa between 1984 and 2014. Design/methodology/approach The study employs a dynamic panel data approach estimated by the system generalised method of moments technique in a bid to control for endogeneity. Findings The authors find a significant positive impact of undervaluation on sectoral growth which increases with capital accumulation. Also, the authors confirm that undervaluation promotes sectoral growth up to a point where further increases in undervaluation retards growth. Practical implications The results confirm the importance of policies that keep the domestic currency weaker to foster sectoral growth. Originality/value The originality of this paper lies in establishing the impact of exchange rate undervaluation on growth at a sector level in the context of South Africa using a dynamic panel data approach.