Empirical analysis of real exchange rate and export performance in Tanzania 1964-2004

This study examines the effects of real exchange rate misaligment and real exchange rate volatility on export performance in Tanzania in the period 1964-2004. The study determines the equilibrium real exchange rate, real exchange rate misaligment, real exchange rate volatility and assesses the importance of real and monetary fundamentals in real exchange rate determination. The dynamic ordinary least square contegration technique and error correction methodology were applied. The study also examines impact of monetary policy shock on real exchange rate misalignment applying granger causality test, impulse response and variance decomposition techniques. The findings indicate that the most important fundamentals that determine the real exchange rate in the long-run are terms of trade, government consumption expenditure, net aid inflows, degree of openness of the economy and real GDP per capita. The study also found that an increase in real exchange rate volatility adversely affects exports. Based on the main conclusions, policies maintaining the stability of domestic price, reducing exchange rate functions, reducing real exchange rate overvaluation, reducing excess money supply and trade liberalization are recommended.