Macroeconomic Conditions and Exchange Rate Misalignment: A Comparative Analysis of Malawi and South Africa
Keywords:
Exchange rate misalignment; macroeconomic variables; Malawi, Markov regime-switching model; South AfricaAbstract
This study investigates the effects of macroeconomic indicators on exchange rate misalignment in South Africa and Malawi under bull and bear market conditions. Given the importance of exchange rate stability in open economies, persistent misalignment can distort resource allocation and hinder economic growth. The study employs a Markov regime-switching model using annual time series data from 1986 to 2024. The results reveal distinct country-specific and regime-dependent effects. In Malawi, the trade balance growth rate negatively influences exchange rate misalignment, while the interest rate differential has a positive and significant effect in the bull regime. In South Africa, during the bull regime, the growth rates of the trade balance, terms of trade, GDP, and interest rate differential all positively and significantly affect exchange rate misalignment. In the bear regime, the determinants differ. For Malawi, terms of trade, inflation, and trade balance growth rates have a negative and significant impact on exchange rate misalignment. In contrast, for South Africa, only the interest rate differential remains statistically significant. Overall, the findings highlight that exchange rate misalignment is influenced by varying macroeconomic factors across countries and market regimes, suggesting the need for context-specific and adaptive exchange rate policies to ensure stability.
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