Browsing by Author "Mkenda, Adolf F."

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    Determinants of parallel market exchange rate in Tanzania
    (1995) Mkenda, Adolf F.
    Tanzania has been in serious macroeconomic problem characterized by, among others, a huge and persistent external imbalance for more than a decade now. Despite this problem the government maintained a fixed exchange rate regime, where prior to 1986 passive stance prevailed but gave way to more frequent adjustments from 1986 onward. Since the exchange rate was fixed below the market clearing rate excess demand for foreign exchange emerged. The government resorted to exchange controls and restrictions. This led to the development of parallel market for foreign exchange. Unifying the parallel exchange rate and the official exchange rate is one of the objectives of economic reforms measure. To attain this objective an understanding of the factors determining the parallel exchange rate is imperative. This study sets out to investigate the determinants of the parallel market exchange rate in Tanzania. The hypothesis guiding this study is that the parallel market exchange rate is an increasing function of the official exchange rate, the ratio of the domestic prices to foreign prices and expected inflation. Chapter four of this study gives the empirical analysis. The empirical analysis confirms that the parallel market exchange rate is an increasing function of the official exchange rate and the ratio of the domestic prices to foreign prices. Further, the elasticity of the parallel exchange rate to official exchange rate is less than unit, suggesting that devaluation reduces the parallel market premium. However the hypothesis that the parallel market for foreign exchange is an increasing function of the expected inflation is rejected. The main policy implication of this study is that devaluation can reduce the gap between the official rate and the parallel rate. Also, in order to check the depreciation of the parallel market exchange rate domestic price stability must be maintained.