Price Adjustment Behaviour of Manufacturing and Service Sector Firms in Tanzania: A Survey Evidence of Price Stickiness

Abstract

Price stickiness is one of the key assumptions of New Keynesians macroeconomic models used to support monetary policy analysis and medium term macroeconomic forecasting by central banks. However, there has been little micro level evidence to back this assumption in developing countries which are characterized by regular economic shocks. This study is therefore designed to investigate price adjustment behavior of manufacturing and service sector firms in Tanzania. More specifically, this paper examines the existence, extent and direction of price stickiness in Tanzania, establish factors which are associated with sluggish adjustment of nominal prices and explore whether companies in Tanzania react to demand and cost shocks symmetrically.

The survey method was used to study different aspects of pricing behavior among selected companies in Dar es Salaam, Tanzania. The preliminary results of the study suggest that: (i) majority of surveyed firms change price of main product/service yearly or more than a year, indicating that the overall prices are sticky in Tanzania, but the degree of price rigidity is lesser than in most of developed countries; (ii) price increases are substantially more prominent in Tanzania than price decreases implying that prices are generally sticky downward; (iii) implicit and explicit contracts theories are important in explaining price stickiness, while menu costs appears insignificant to companies; (iv) price adjustment is asymmetrical, companies are more prompted by shocks that lead to profit losses than those that led to profit gains.

Our micro level survey results support the modeling of inflation dynamics in Tanzania based on the assumption of price stickiness. The study therefore serves as an evidence based green light for the Bank of Tanzania to continue embark on Forecasting and Policy Analysis System (FPAS) framework which is grounded on new Keynesian assumptions to support forward looking monetary and exchange rate policy analysis and medium term forecasting.

Keywords: New Keynesian Economics, Forecasting, DSGE models, Price stickiness