Factors influencing exchange rate fluctuations in developing countries: the case of Tanzania

The study examines the factors influencing the real exchange rate fluctuations in developing countries with particular attention to Tanzania where annual data from 1981 to 2000 period were used. The estimation of the fundamental variables was done by Ordinary Least square (OLS) technique where the MS Excel and Minitab packages were used to run the data. Particular attention is directed to the macroeconomic variables such as the terms of trade, capital flows, interest rate, per capita GDP, openness degree of the economy, government consumptions, and money supply (M2) as factors influencing the real exchange rate. The study reveals that money supply, Capital flow and interest rate have the hypothesized sign. Except for the coefficient of interest rates which is statistically insignificant the other two are statistically insignificant. Terms of trade are statistically insignificant with negatively correlated with real exchange rate depreciation but statistically significant. Government expenditure and per capita GDP are insignificant. By introducing the Best subsets method, the study reveals that the interest rate variable still bears the hypothesized sign and is statistically significant, while government expenditure, per capita GDP and Openness degree of the economy to trade which are statistically significant have opposite sign and have an influence.