Impact of Foreign Exchange Intervention on Shilling fluctuation in Tanzania

Elinaza, Abduel (2013) Impact of Foreign Exchange Intervention on Shilling fluctuation in Tanzania. Masters thesis, The Open University of Tanzania.

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Abstract

This study investigates the impact of foreign exchange market intervention and shilling in Tanzania. The study aspires to develop a deeper understanding of foreign exchange intervention in the country. Literatures suggest that central banks intervene in the foreign exchange market for several reasons, including calming disorderly markets, correct misalignments, and accumulating reserves. But literatures a one thing and market disorder another thing all together. The recently Bank of Tanzania intervention and shilling fluctuations has led to renewed interest in how central banks should intervene to maximize it efficacy. This paper sheds light on a number of operational aspects of intervention. For this purpose, economic technique OLS, cointegration test, and Error Correction Mechanism was applied to time series. To gauge impact of intervention, Error Correction Term was applied. The study selected weekly Interbank Foreign Exchange Market and foreign exchange inflows data from 2006q1 to 2012q1. It also presents evidence on intervention practices based on the outcome of the results. The results shows that BoT intervention play little role to correct exchange rates levels and at short term are increasing fluctuation while no proof was registered that commercial banks sales have either positive nor negative impact on the market. The empirical results of this study raise a number of policy issues, because Tanzania is a net import-economy, therefore, the central bank has to strike a balance between the exchange rates that will not discouraging exports but at the same time controlling prices up spiral, which are the results of imports because of shilling depreciations. Since, higher inflation has spiral effects, be it economically or politically.

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