| This dissertation consists of three essays about the Tanzanian economy. The first essay is descriptive, tracing the evolution and stance of the monetary and financial sectors since the establishment of the Bank of Tanzania in 1966. It describes developments in the banking and financial sector, the performance of the economy, and the conduct of monetary policy. It provides background for the rest of the study. This study finds that the early 1990s financial sector reforms changed the structure of the banking and financial sector from a small sector that was dominated by government into a large, private-owned and dynamically competitive industry. The key features that contributed to this transformation include the amendments of the BOT Act, particularly the empowerment of the central bank in playing its roles, liberalization of the interest and exchange rates, and more. The ultimate outcome of these reforms can be inferred in terms of a more stable economy as evidenced by stable economic growth, low inflation, and market-determined interest and exchange rates.;The second essay examines whether there has been any systematic relationship between monetary policy targets and indicators during the post-reform period of 1992-2011 and whether monetary policy involves inertia. The results show evidence of a systematic relationship between monetary policy targets and indicators. The central bank tightens monetary policy by raising the interest rate in response any of several factors: increases in inflation, increases in the real output gap, or depreciation in the nominal exchange rate. Also, monetary policy tightening is affected by reduction in the growth of the monetary base as a response to the decrease in the nominal output gap and as a response to the nominal exchange rate depreciation. Using nominal GDP growth as an alternative measure of economic activity, results show that the central bank decreases the growth in the monetary base in response to increases in the nominal GDP growth or to the depreciation in the nominal exchange rate. With regards to monetary policy inertia, the study finds evidence of partial adjustments to deviations from the monetary base and the interest rate targets, suggesting monetary policy inertia.;The last essay analyzes the drivers of the nominal exchange rate during the floating exchange rate regime (1992-2011). The study investigates whether depreciation in the nominal exchange rate following liberalization of the exchange rate in the early 1990s can be explained by the monetary approach to exchange rate determination as is claimed in the literature. The study finds evidence that the monetary approach to nominal exchange rate determination explains depreciation of the nominal exchange rate during the flexible exchange rate regime. The Tanzanian shilling depreciates with increase in the domestic money stock, price level and the interest rate relative to their foreign (i.e., U.S) counterparts. Further, depreciation of the Tanzanian shilling relative to the U.S. dollar occurs when the domestic real income decreases relative to the foreign income. |
