Movement and Misalignment of Exchange Rate: Analysis of Its Impact on Tanzanian Economy

Abstract

The study examines impact of exchange rate movement and misalignment on economic growth with evidence from Tanzania. The study uses annual data which covers a period of 47 years from 1967 to 2013.  The paper employs multiple econometrics methods and models. The autoregressive Distributed lag model estimated by ordinary least square to determine anticipated and unanticipated exchange rate movements. Also, generalized method of moment (GMM) is applied to examine impact of exchange rate movement and misalignment on economic growth. Moreover, log-linear model used to determine growth trend of the variables pre and post economic reform. Based on findings exchange rate shock is persistent and significant determined by balance of trade. Results found no evidence of impact of unanticipated exchange rate movement on GDP, private sector spending, export and import growth. Besides, anticipated exchange rate depreciation found to have significant negative impact on GDP and import growth but positive impact on private spending. Moreover, study found exchange rate overvaluation significantly decrease export growth and GDP but found to have significant positive impact on import growth and private sector spending. Thus, insight to policy makers, depreciation policy may be effective if country will increase its production capacity without much dependence on imported capital and intermediate goods.

Keywords: Anticipated exchange rate shock, Economic growth, Exchange rate misalignment, Generalization method of moments, unanticipated exchange rate shock