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Aid inflows and the real effective exchange rate in Tanzania

Author

Listed:
  • Li, Ying
  • Rowe, Francis

Abstract

Tanzania is well placed to receive a significant increase in aid inflows in coming years. Despite the potential for the additional aid inflows to raise income levels in the country, increasing them may bring about structural changes in the economy that may be unwelcome. One such change is an appreciation of the real exchange rate that leads to a contraction of traditional export sectors and a loss of export competitiveness. This paper employs a reduced-form equilibrium real exchange rate approach to explain movements in Tanzania's real effective exchange in recent decades. Particular attention is paid to the relationship between aid inflows and the real effective exchange rate. The authors find that the long-run behavior of the real effective exchange rate is influenced by terms of trade movements, the government's trade liberalization efforts, and aid inflows. Positive terms-of-trade movements are associated with an appreciation, periods of improving trade liberalization are associated with a depreciation, and increases in aid inflows are associated with a depreciation in the real effective exchange rate. Although the last result is non-standard, it is not empirically unique and does have theoretical underpinnings. A detailed analysis of this relationship over the last decade shows that the Bank of Tanzania's response to aid inflows is likely the main reason for the finding.

Suggested Citation

  • Li, Ying & Rowe, Francis, 2007. "Aid inflows and the real effective exchange rate in Tanzania," Policy Research Working Paper Series 4456, The World Bank.
  • Handle: RePEc:wbk:wbrwps:4456
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    References listed on IDEAS

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    Cited by:

    1. Pedro M. G. Martins, 2013. "Do large capital inflows hinder competitiveness? The Dutch disease in Ethiopia," Applied Economics, Taylor & Francis Journals, vol. 45(8), pages 1075-1088, March.
    2. Luc Savard, 2010. "Scaling up infrastructure spending in the Philippines: A CGE top-down bottom-up microsimulation approach," International Journal of Microsimulation, International Microsimulation Association, vol. 3(1), pages 43-59.
    3. Sayeed, Yeasmin, 2014. "Trade-offs in Achieving Human Development Goals for Bangladesh," Working Papers 2014:6, Örebro University, School of Business.
    4. Dorothée Boccanfuso & Marcelin Joanis & Mathieu Paquet & Luc Savard, 2015. "Impact de productivité des infrastructures: Une application au Québec," Cahiers de recherche 15-06, Departement d'Economique de l'École de gestion à l'Université de Sherbrooke.

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    Keywords

    Currencies and Exchange Rates; Debt Markets; Economic Theory&Research; Emerging Markets; Economic Stabilization;

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