REAL EXCHANGE RATE BEHAVIOUR IN TANZANIA
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Date
2004-10-06
Authors
PANTALEO, INNOCENT M.
Journal Title
Journal ISSN
Volume Title
Publisher
University of Dar es Salaam
Abstract
In this study the behaviour of Tanzania’s real exchange rate for the period 1966 to
2001 is examined through investigating the determinants of real exchange rate and its
misalignment. The period was chosen to cover the years in which the Bank of
Tanzania has been under operation. The study has employed econometric techniques
of time series, with exchange rate misalignment analyzed using two approaches, the
first one being use of the difference between actual real exchange rate and equilibrium
real exchange rate and the second one using exchange rate premium as a proxy of
misalignment.
The results show that the long run determinants of real exchange rate in Tanzania
include debt servicing, openness, terms of trade and reforms. The main hypothesis
that periods of major external imbalance, foreign exchange control and fixed
exchange rate regime are characterized with exchange rate misalignment which tend
to disappear during the period of floating exchange rate regime was not rejected.
Hence the conclusion that the period of major external imbalance, foreign exchange
control and fixed exchange rate regime in Tanzania was characterized by exchange
rate misalignment, which is disappearing during the period under which the economic
reforms are being implemented.
In addition, the results show that in the absence of other interventions, actual real
exchange rate converge very slowly towards the long run equilibrium level. Hence,
the study recommends the use of the nominal devaluation, in the short run as a
powerful tool for reestablishing real exchange rate equilibrium.