An analysis of whether diamond prices have an impact on Botswana's exchange rate

Abstract

In recent years the behavior of exchange rates has been of much interest especially where primary commodity producing developing countries are involved. In this paper we focus on Botswana, the world’s largest diamond producer by value and the second largest by quantity. We study the relationship between global diamond prices and the exchange rate of Botswana using time series data ranging from January 2008 to December 2017. A vector autoregressive model VAR with a Cholesky decomposition method is employed to study whether there is an empirical relationship between monthly diamond price movements and the US Dollar-Botswana Pula exchange rate. The findings show that there is no causality from the diamond prices to the exchange rates but rather the exchange rate has some clout in the diamond prices. The exchange rates seem to be impervious to the price movements.