Dollarization And Currency Devaluation:an Empirical Investigation(Case Study Tanzania-USD/TZS)

The debate regarding the usage of domestic currency versus dollarizing an economy is still robust in many developing countries.Dollarizing an economy commonly entails dollarizing bank deposits and loans,transacting in dollars and tagging prices of goods and services in dollar.This paper's main focus is dollarization and currency devaluation;of which such are yet unresolved both theoretically and empirically.Most articles and journals have shed some light on the effects of dollarization being lower inflation rate,price instability in the local market and insignificant economic growth but only focusing on the Latin American and Asian countries.To shed light upon this matter,this paper is focused on African economies,specifically Tanzania,where commercial banks have the power to open foreign currency deposit accounts for any account holder,giving them the freedom to hold foreign currency and pay in foreign currency.Using monthly nominal exchange rate data for the study period 2000-2014,we introduced GARCH models to examine the relationship between dollarization and exchange rate.The Autoregressive Conditional Heteroscedasticity models indicate that dollarization does indeed induce currency depreciation as well as exchange rate volatility.Based on the findings and conclusions from other literature,this paper also proposes measures on how the country can prevent or offset the negative impacts of dollarization.