Browsing by Author "Temu, Mboni Abraham"

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    Effects of real exchange rate volatility on bilateral trade between Tanzania and China
    (University of Dar es Salaam, 2017) Temu, Mboni Abraham
    This study examines the effect of real exchange rate volatility on bilateral trade between Tanzania and China for the period of 1978 to 2015. This is implemented by estimating export, import and trade balance models that included real exchange rate volatility as one of the explanatory variables. The study uses the bilateral real exchange rate between Tanzania and China because this study focuses on one of Tanzania’s biggest trading partners. The study employs recent ARCH family models to measure volatility. Firstly, the GARCH (1, 1) model is employed but when it is found to violate the non-negativity condition, the EGARCH (1, 1) is employed to resolve the problem. The bounds test is used to test for cointegration of variables, and ultimately error correction models for export, import and trade balance functions are estimated. The results show that real exchange rate volatility has insignificant effects on the trade between Tanzania and China rather it is depreciation in the real exchange rate that improves the trade with negative implications on the imports from China. Therefore, any policy action to reduce volatility with aim of improving trade flows will be unjustified. However, the study does not dismiss the possibility of real exchange rate volatility to affect the economy through other channels and therefore appropriate policies could be applied to avoid larger exchange rate fluctuations. Also, real exchange rate depreciation does not help to improve the trade pattern, but rather, it reduces trade competitiveness. Thus, policy makers should look for alternative mechanisms to promote trade such as export diversification, promotion of industrialization and modality of managing the special economic zones.