Current literature examines foreign exchange imbalances using micro and macro level data. On a micro level, short to medium run exchange rate movements are monitored in the foreign exchange market, and on the macro level, exchange rates are determined in the foreign exchange market and the financial intermediaries’ ability to bear risk.

This research aim to replicate Dell’Eva and Viegi’s (mimeo) tractable macroeconomic model for South Africa.

It shows that:

1. Markov-Switching driven by the VIX External factors (global financial cycle) determine whether South Africa is perceived as risky or not
2. ZAR is more volatile in the risky regime
3. The SARB responds differently according to the regime
4. Households’ incentive to consume domestic or foreign goods determine the financier’s position
5. The effect of the demand shock is absorbed by the financier while the effect of a supply shock is exacerbated by the financier