NBER WORKING PAPER SERIES ON THE RAND: DETERMINANTS OF THE SOUTH AFRICAN EXCHANGE RATE Jeffrey Frankel

This work was done with the able research assistance of Melesse Tashu. The paper is a contribution within the Macroeconomics Group of the Harvard University Center for International Development's Project on South Africa: Performance and Prospects. Relative to an earlier draft in mid-2006, the major innovations in this paper include: the addition of a theoretical model, the use of sovereign spread data to measure the risk premium and forward-looking inflation forecasts to measure real interest rates, allowance for a break in 1995 at the end of apartheid and capital controls, and a dynamic simulation of the real value of the rand over 2003-2006. Thanks to Lesetja Kganyago, Ben Smit and other participants in the July 2006 meetings in Pretoria and to Brian Kahn; to Stan du Plessis and other participants in the January 2007 meetings in Pretoria and Stellenbosch; and to Ricardo Hausman, Federico Sturzenegger, and other members of the CID team. None are implicated in the conclusions. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau o