Aid Inflows and the Real Effective Exchange Rate in Tanzania

Tanzania is well placed to receive a significant increase in aid inflows in coming years. Despite the potential for the additional aid inflows to raise income levels in the country, increasing them may bring about structural changes in the economy...

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Bibliographic Details
Main Authors:	Li, Ying, Rowe, Francis
Format:	Policy Research Working Paper
Language:	English
Published:	World Bank, Washington, DC 2012
Subjects:	ACCUMULATION OF RESERVES AGGREGATE DEMAND BALANCE OF PAYMENTS BALANCE OF PAYMENTS CRISES BALANCE OF PAYMENTS CRISIS BILATERAL EXCHANGE RATES BILATERAL TRADE BILL BLACK MARKET CAPITAL ACCOUNT CAPITAL FLOWS CAPITAL INFLOWS CAPITAL MARKET CASH FLOW CENTRAL BANK CHOW TEST COMMODITY PRICE COMMODITY PRICES COMPETITIVE DEVALUATION CONSUMER PRICE INFLATION CONSUMPTION EXPENDITURES CORRELATION COEFFICIENT CURRENT ACCOUNT CURRENT ACCOUNT BALANCE CURRENT ACCOUNT DEFICIT CUSTOMS DUTIES DEBT DEBT RELIEF DEBT SERVICE DECLINE IN INFLATION DEPRECIATION DEPRECIATIONS DEVALUATION DEVALUATIONS DIRECTION OF TRADE DISCOUNT RATE DOMESTIC CREDIT DOMESTIC CURRENCY DOMESTIC CURRENCY PRICE DOMESTIC DEMAND DOMESTIC ECONOMY DOMESTIC GOODS DOMESTIC INTEREST RATES DOMESTIC PRICES DUTCH DISEASE ECONOMIC POLICY EQUILIBRIUM EQUILIBRIUM LEVEL ERROR CORRECTION MODEL ERROR CORRECTION TERM ERROR TERM EXCHANGE RATE MISALIGNMENT EXCHANGE RATE POLICY EXCHANGE RATE REGIME EXCHANGE RATE REGIMES EXCHANGE RATES EXPLANATORY VARIABLE EXPLANATORY VARIABLES EXPORT COMPETITIVENESS EXPORT EARNINGS EXPORT MARKETS EXPORT PERFORMANCE EXPORT REVENUES EXPORTER EXTERNAL BALANCE EXTERNAL COMPETITIVENESS EXTERNAL EQUILIBRIUM EXTERNAL FACTORS FISCAL DEFICIT FISCAL IMBALANCES FISCAL POLICY FIXED EXCHANGE RATE FIXED EXCHANGE RATE REGIME FIXED RATE FIXED RATE REGIME FLEXIBLE EXCHANGE RATE FLEXIBLE EXCHANGE RATE REGIME FOREIGN CURRENCY FOREIGN EXCHANGE FOREIGN EXCHANGE MARKET FOREIGN EXCHANGE MARKETS FOREIGN PRICE LEVELS FRANC ZONE FUNDAMENTAL DETERMINANT FUTURES GENERAL EQUILIBRIUM GLOBALIZATION GOLD GOVERNMENT BORROWING GROWTH RATE GROWTH RATES IMBALANCES IMPORT IMPORT CONTENT IMPORT LIBERALIZATION IMPORT LICENSING IMPORT PRICES IMPORT TARIFFS IMPORTS INCOME LEVELS INSTRUMENTAL VARIABLE INTERNATIONAL BANK INTERNATIONAL CAPITAL FLOWS INTERNATIONAL COMPETITIVENESS INTERNATIONAL MARKET INTERNATIONAL PRICE INTERNATIONAL PRICES INTERNATIONAL RESERVES INTERNATIONAL TRADE INVESTMENT RATE INVESTMENT RATES INVESTMENT SPENDING LIQUIDITY LOCAL CURRENCY LONG RUN EQUILIBRIUM LONG-RUN EQUILIBRIUM LONG-TERM EQUILIBRIUM LOSS OF COMPETITIVENESS LOW-INCOME COUNTRIES LOW-INCOME COUNTRY MACROECONOMIC CONDITIONS MACROECONOMIC MODELS MACROECONOMIC REFORMS MACROECONOMIC STABILITY MACROECONOMIC STABILIZATION MACROECONOMIC VARIABLES MARKET SHARE MISALIGNMENT MISALIGNMENTS MONETARY DETERMINANTS MONETARY POLICY MONEY SUPPLY NOMINAL DEPRECIATION NOMINAL EXCHANGE RATE NOMINAL EXCHANGE RATES OIL PRICES OPEN ECONOMY OUTPUT GAP OVERVALUATION PARALLEL EXCHANGE RATE PARALLEL EXCHANGE RATES PARALLEL MARKET PARALLEL MARKET RATE PARALLEL MARKETS PARALLEL NOMINAL EXCHANGE RATE POST-CRISIS PERIOD POVERTY REDUCTION PRICE COMPETITIVENESS PRICE INDEX PRICE INDICES PRIMARY COMMODITIES PRIMARY COMMODITY PRIVATE CAPITAL PUBLIC EXPENDITURE PUBLIC EXPENDITURES PUBLIC INVESTMENT PUBLIC SPENDING PURCHASING POWER PARITY REAL APPRECIATION REAL DEPRECIATION REAL EFFECTIVE EXCHANGE RATE REAL EFFECTIVE EXCHANGE RATES REAL EXCHANGE RATE REAL EXCHANGE RATE APPRECIATION REAL EXCHANGE RATE BEHAVIOR REAL EXCHANGE RATES REGIME CHANGES RELATIVE DOMESTIC PRICE RELATIVE PRICE RELATIVE PRICES RESERVE ACCUMULATION RESERVE BANK ROBUSTNESS CHECKS SHORTFALLS SPEED OF ADJUSTMENT STRUCTURAL REFORM STRUCTURAL REFORMS SUM OF IMPORTS SUPPLY RESPONSE SUPPLY SIDE SUPPLY-SIDE SUSTAINABLE CAPITAL T-BILLS TAX TAX INCREASES TRADABLE GOODS TRADE DEFICIT TRADE LIBERALIZATION TRADE MOVEMENTS TRADE REGIME TRADE SHARES TRADE STATISTICS TRADING TRADING PARTNERS TREASURY BILLS UNCERTAINTY UPWARD PRESSURE WEIGHTS WHOLESALE PRICE INDICES WORLD MARKETS WORLD PRICE
Online Access:	http://documents.worldbank.org/curated/en/2007/12/8894922/aid-inflows-real-effective-exchange-rate-tanzania http://hdl.handle.net/10986/7514

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Summary:	Tanzania is well placed to receive a significant increase in aid inflows in coming years. Despite the potential for the additional aid inflows to raise income levels in the country, increasing them may bring about structural changes in the economy that may be unwelcome. One such change is an appreciation of the real exchange rate that leads to a contraction of traditional export sectors and a loss of export competitiveness. This paper employs a reduced-form equilibrium real exchange rate approach to explain movements in Tanzania's real effective exchange in recent decades. Particular attention is paid to the relationship between aid inflows and the real effective exchange rate. The authors find that the long-run behavior of the real effective exchange rate is influenced by terms of trade movements, the government's trade liberalization efforts, and aid inflows. Positive terms-of-trade movements are associated with an appreciation, periods of improving trade liberalization are associated with a depreciation, and increases in aid inflows are associated with a depreciation in the real effective exchange rate. Although the last result is non-standard, it is not empirically unique and does have theoretical underpinnings. A detailed analysis of this relationship over the last decade shows that the Bank of Tanzania's response to aid inflows is likely the main reason for the finding.

Aid Inflows and the Real Effective Exchange Rate in Tanzania

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