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An Empirical Investigation of the Exchange Rate Pass-Through to Inflation in Tanzania

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Author Info

  • Nkunde Mwase

Abstract

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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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 06/150.

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Length: 34
Date of creation: 01 Jun 2006
Date of revision:
Handle: RePEc:imf:imfwpa:06/150

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Keywords: Exchange rates; Consumer prices; inflation; exchange rate; exchange rate pass; exchange rate movements; money supply; exchange rate shocks; monetary policy; foreign exchange; inflation equation; inflation rate; increase in inflation; nominal effective exchange rate; effective exchange rate; nominal exchange rate; bilateral exchange rate; nominal bilateral exchange rate; exchange rate depreciation; exchange rate fluctuations; high inflation; effective exchange rates; exchange rate shock; inflationary pressure; aggregate demand; inflationary expectations; exchange rate appreciation; price stability; low inflation; exchange rate regime; lower inflation; foreign exchange market; exchange rate policy; exchange controls; exchange rate developments; monetary financing; exchange rate changes; market exchange rates; floating exchange rate; price level; real output; exchange rate indices; high inflation episodes; price inflation; terms of trade; effect of exchange rate changes; floating exchange rate policy; flexible exchange rate regime; exchange rate index; exchange rate unification; flexible exchange rate; foreign currency; annual inflation; inflationary pressures; currency appreciation;

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References

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  1. Sofronis Clerides, 2004. "Gains from Trade in Used Goods: Evidence from the Global Market for Automobiles," University of Cyprus Working Papers in Economics 6-2004, University of Cyprus Department of Economics.
  2. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-38, July.
  3. Edward Buffie & Christopher Adam & Stephen O'Connell & Catherine Pattillo, 2004. "Exchange Rate Policy and the Management of Official and Private Capital Flows in Africa," IMF Staff Papers, Palgrave Macmillan, vol. 51(s1), pages 126-160, June.
  4. Bernanke, Ben S., 1986. "Alternative explanations of the money-income correlation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 49-99, January.
  5. Taylor, John B., 2000. "Low inflation, pass-through, and the pricing power of firms," European Economic Review, Elsevier, vol. 44(7), pages 1389-1408, June.
  6. Jonathan McCarthy, 2007. "Pass-Through of Exchange Rates and Import Prices to Domestic Inflation in Some Industrialized Economies," Eastern Economic Journal, Eastern Economic Association, vol. 33(4), pages 511-537, Fall.
  7. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  8. Dalia Hakura & Ehsan U. Choudhri, 2001. "Exchange Rate Pass-Through to Domestic Prices," IMF Working Papers 01/194, International Monetary Fund.
  9. Pinelopi K. Goldberg & Michael M. Knetter, 1996. "Goods Prices and Exchange Rates: What Have We Learned?," NBER Working Papers 5862, National Bureau of Economic Research, Inc.
  10. Jose Manuel Campa & Linda S. Goldberg, 2002. "Exchange rate pass-through into import prices: a macro or micro phenomenon?," Staff Reports 149, Federal Reserve Bank of New York.
  11. Volker Treichel, 2005. "Tanzania's Growth Process and Success in Reducing Poverty," IMF Working Papers 05/35, International Monetary Fund.
  12. José Manuel Campa & Linda S. Goldberg, 2005. "Exchange Rate Pass-Through into Import Prices," The Review of Economics and Statistics, MIT Press, vol. 87(4), pages 679-690, November.
  13. Joseph E. Gagnon & Jane Ihrig, 2001. "Monetary policy and exchange rate pass-through," International Finance Discussion Papers 704, Board of Governors of the Federal Reserve System (U.S.).
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Citations

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Cited by:
  1. International Monetary Fund, 2012. "Exchange Rate Pass-Through in Sub-Saharan African Economies and its Determinants," IMF Working Papers 12/141, International Monetary Fund.
  2. Naz, Farah & Mohsin, Asma & Zaman, Khalid, 2012. "Exchange rate pass-through in to inflation: New insights in to the cointegration relationship from Pakistan," Economic Modelling, Elsevier, vol. 29(6), pages 2205-2221.
  3. Kenji Moriyama, 2008. "Investigating Inflation Dynamics in Sudan," IMF Working Papers 08/189, International Monetary Fund.
  4. repec:asi:ajoerj:2013:p:363-380 is not listed on IDEAS
  5. Jiang, Jiadan & Kim, David, 2013. "Exchange rate pass-through to inflation in China," Economic Modelling, Elsevier, vol. 33(C), pages 900-912.
  6. Sanusi, Aliyu Rafindadi, 2010. "Exchange rate pass-through to consumer prices in Ghana: Evidence from structural vector auto-regression," MPRA Paper 29491, University Library of Munich, Germany.
  7. Abdullah Almounsor, 2010. "Inflation Dynamics in Yemen," IMF Working Papers 10/144, International Monetary Fund.
  8. Kadima D. Kalonji & Jan Gottschalk & Ken Miyajima, 2008. "Analyzing Determinants of Inflation When there Are Data Limitation:The Case of Sierra Leone," IMF Working Papers 08/271, International Monetary Fund.

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