Exchange rate determinants A Case Study of Tanzania

Much has been said and written about the impact of exchange rate fluctuations in an economy. More effort is needed to examine the factors that determine exchange rate fluctuation in the context of developing countries like Tanzania. This study examined the factors which determine the exchange rate fluctuations in developing countries with particular attention being Tanzania using annual data from 1995 to 2010. The study was done by estimation of fundamental variables using Ordinary Least Square (OLS) technique where the MS Excel was used to run the data. This study revealed that per capita GDP are positively correlated with real exchange rate as explained in the hypothesis of this study that “Per capita GDP is positively correlated with real exchange rate appreciation” For the case of money supply, the resulted sign is the same as mentioned by hypothesis indicating that Tanzanian shilling will depreciate whenever there is an increase of money supply in the market, because an excess liquidity in the economy will result an increase of inflation. Basing on the existing theoretical literature about the determinants of real exchange rate and using multiple regression results, capital flow, interest rate Terms of trade, Openness degree of economy to trade and Government expenditure are positively correlated with exchange rate. The findings from the study suggest, therefore, that policy makers need to observe the current trend of a number of economic variables. The aim should be to ensure stability of exchange rate because as stated before that economic growth is affected by exchange rate movement.