An Empirical Investigation of the Exchange Rate Pass-Through to Inflation in Tanzania

The paper examines the effect of exchange rate changes on consumer prices in Tanzania using structural vector autoregression (VAR) models. Using a data set covering the period 1990-2005, we find that the exchange rate pass-through to inflation declined in the late 1990s despite the depreciation of the currency. This could be partly attributed to the macroeconomic and structural reforms that were implemented during this period. The decline in the pass-through does not necessarily imply that exchange rate fluctuations are less significant in explaining macroeconomic fluctuations. The recent increase in the share of imports in the economy suggests that the pass-through could rise over the medium term. The findings imply that the authorities should remain vigilant in assessing the potential impact of foreign prices on the dynamics of inflation in Tanzania. In this regard, the authorities should seek to maintain low and stable inflation and continue the ongoing structural reforms designed to improve efficiency and increase competition.Exchange rates;Consumer prices;inflation, exchange rate, exchange rate pass, exchange rate movements, money supply, exchange rate shocks, monetary policy, foreign exchange, inflation equation, inflation rate, increase in inflation, nominal effective exchange rate, effective exchange rate, nominal exchange rate, bilateral exchange rate, nominal bilateral exchange rate, exchange rate depreciation, exchange rate fluctuations, high inflation, effective exchange rates, exchange rate shock, inflationary pressure, aggregate demand, inflationary expectations, exchange rate appreciation, price stability, low inflation, exchange rate regime, lower inflation, foreign exchange market, exchange rate policy, exchange controls, exchange rate developments, monetary financing, exchange rate changes, market exchange rates, floating exchange rate, price level, real output, exchange rate indices, high inflation episodes, price inflation, terms of trade, effect of exchange rate changes, floating exchange rate policy, flexible exchange rate regime, exchange rate index, exchange rate unification, flexible exchange rate, foreign currency, annual inflation, inflationary pressures, currency appreciation