Exchange rate depreciation, money supply and inflation: the Tanzanian experience 1970-1994.

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University of Dar es Salaam
This study examines the effects of exchange rate depreciation and money supply on inflation in Tanzania. Our objective is achieved through the use of a macroeconometric model that captures the key aspects of the linkages between the above variables. In addition to this, we rely on the use of trends in the relationship between inflation and money supply, real GDP as well as exchange rate. In this study, both qualitative and quantitative methods of analysis are used. So far, our findings highlight several points of importance. Evidence from trend analysis suggests that domestic money supply, real output, the shadow price of exchange rate, the parallel market exchange rate, and more recently, official exchange rate cannot be ignored in evaluating the proximate causes of inflation in Tanzania. Statistical estimates of the structural equations are also quite revealing. The results of inflation equations demonstrate that, exchange rate is a significant determinant of inflation. Inadequate output and monetary expansion also feature prominently in these equations. But the coefficient of the expected rate of inflation, though positive, is not statistically significant even at 10% level. Dummy variables for break up of the East African Community and Uganda war turn out to be insignificant. To test for a structural break in the mid eighties, the results show that the relationship between the Tanzanian inflation rate and its key determinants changed in the eighties. The major changes in economic policy that occurred in the years 1984 to 1986 could be one cause for the instability. In view of the above, the study suggests that, no single measure is adequate to address the problem of inflation in Tanzania. Monetary measures must be accompanied with appropriate fiscal policies. Much as the Bank of Tanzania struggles to control money supply, the government also has to control its expenditure.
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Inflation, Finance, Money supply, Foreign exchange, Tanzania
Mtui, J. M. (1996). Exchange rate depreciation, money supply and inflation: the Tanzanian experience 1970-1994. Master dissertation, University of Dar es Salaam. Available at (