An empirical investigation of the exchange rate pass-through to inflation in Tanzania, Issues 2006-2150
International Monetary Fund, 2006 - Business & Economics - 34 pages
The paper examines the effect of exchange rate changes on consumer prices in Tanzania using structural vector autoregression (VAR) models. Using a data set covering the period 1990-2005, we find that the exchange rate pass-through to inflation declined in the late 1990s despite the depreciation of the currency. This could be partly attributed to the macroeconomic and structural reforms that were implemented during this period. The decline in the pass-through does not necessarily imply that exchange rate fluctuations are less significant in explaining macroeconomic fluctuations. The recent increase in the share of imports in the economy suggests that the pass-through could rise over the medium term. The findings imply that the authorities should remain vigilant in assessing the potential impact of foreign prices on the dynamics of inflation in Tanzania. In this regard, the authorities should seek to maintain low and stable inflation and continue the ongoing structural reforms designed to improve efficiency and increase competition.
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Money Exchange Rates and Inflation in Tanzania
A Survey of the Literature
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12-quarter horizon Appendix Bank of Tanzania characterized Choudhri and Hakura Cointegration consumer prices CPI basket Cross Correlation Dar-es-salaam decline decrease in inflation degree of pass-through demand shocks Domestic prices Money economic Effective Exchange Rate error bands estimate exchange rate depreciation Exchange Rate Domestic exchange rate movements exchange rate pass-through exchange rate shocks exogenous Function of inflation Granger causality tests growth henceforth horizon is considered impact of exchange Impulse Response Function incomplete pass-through increase inflation equation inflation in Tanzania innovations International Monetary Fund Jarque-Bera test long-run macroeconomic monetary policy Nominal Effective Exchange nominal exchange rate null hypothesis output gap p-values paper pass-through effect pass-through to inflation percent appreciation percent decrease Period refers potential output prices Money demand Ql1 Impulse Response Rate and Consumer Rate Domestic prices reflects structural reforms supply shocks SVAR Table U.S. dollar variables Variance Decomposition VEC approach Ygap Exchange Rate zero pass-through