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The macroeconomics of delayed exchange-rate unification : theory and evidence from Tanzania (English)

Parallel exchange-rate markets have often been dismissed by authorities as a nuisance or as the domain of a small group of economic saboteurs. Using Tanzania as a case study, the authors argue instead that these markets played a central macroeconomic role in the 1970s and 1980s. They provide a rigorous macroeconomic analysis of the parallel foreign-exchange market and its fiscal implications. First, they investigate the evolution of that market in Tanzania from the mid-1960s to 1990. That period stretched from the adoption of exchange controls to macroeconomic collapse and then to subsequent reforms in the mid- to late 1980s. A reduced -form econometric equation (of a Dornbusch stock-flow model type) indicates that both trade and financial portfolio factors were important in determining the parallel premium, with trade determinants the parallel premium, with trade determinants dominating in the long run, as theory suggests. Then they investigate the fiscal impact of the parallel exchange-rate premium, an issue emphasized in the literature on exchange-rate unification. They construct a counterfactual simulation of fiscal and balance-of-payments flows under alternative assumptions about the indexing of those flows to the parallel and official exchange rate. They find that a more aggressive move toward exchange-rate unification would have already delivered a fiscal bonus by the mid-1980s. Accordingly, unification of the exchange rate would have reduced monetary growth and inflationary pressures. So, contrary to conventional advice often given in Africa and elsewhere, the case of Tanzania suggests that from a fiscal viewpoint there was no economic rationale for gradualism in exchange-rate unification and delay of a move toward convertibility.

Details

  • Author

    Kaufmann, Daniel O'Connell, Stephen A.

  • Document Date

    1999/02/28

  • Document Type

    Policy Research Working Paper

  • Report Number

    WPS2060

  • Volume No

    1

  • Total Volume(s)

    1

  • Country

    Tanzania,

  • Region

    Africa,

  • Disclosure Date

    2010/07/01

  • Doc Name

    The macroeconomics of delayed exchange-rate unification : theory and evidence from Tanzania

  • Keywords

    foreign exchange;export trade;official exchange rate;parallel exchange rate;balance of payment data;real exchange rate;balance of payment accounts;international currency;foreign exchange market;competitive real exchange rate;black market exchange rate;real effective exchange rate;public sector deficit;exchange rate unification;terms of trade;domestic price level;world currency;official foreign exchange;parallel market;domestic currencies;structural adjustment program;foreign exchange inflow;exchange control;bank of tanzania;rate of crawl;foreign exchange transaction;domestic producer price;international financial statistic;exchange rate regime;exchange rate adjustment;current account balance;domestic financial assets;banking system;public sector reform;rate of depreciation;trade balance equation;parallel market rate;aggregate demand effect;share of export;exchange rate reform;net foreign exchange;foreign exchange dealer;Exchange rate policies;exchange rate policy;private sector share;foreign exchange allocation;individuals without access;foreign exchange control;net foreign asset;domestic money supply;foreign exchange value;errors and omission;cost of import;foreign exchange assets;exchange rate expectation;reduction in inflation;public investment program;public sector spending;dual exchange rate;inflation tax rate;parallel exchange market;elasticity of export;foreign exchange receipts;multiple exchange rate;exchange rate system;domestic price index;domestic government bond;rate of inflation;real money demand;central government deficit;illegal trade;import license;steady state;export supply;capital flight;illegal export;domestic monetary;net sales;trade determinants;fiscal implication;monetary growth;foreign financing;money growth;nominal devaluation;export production;foreign currency;interest parity;broad money;negative effect;trade flow;import compression;import liberalization;general equilibrium;budget balance;real wealth;aid flow;housing service;real appreciation;inflationary impact;domestic asset;foreign inflow;monetary expansion;net result;consumer goods;inflationary pressure;price control;commercial bank;international reserve;convertibility restriction;basic model;parastatal sector;fiscal policy;Fiscal policies;import volume;trade volume;import control;empirical result;capital control;fiscal deficit;export revenue;policy package;real devaluation;real depreciation;rhino horn;net effect;export price;aid inflow;resource transfer;macroeconomic collapse;deposit rate;import finance;Exchange Rates;

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Citation

Kaufmann, Daniel O'Connell, Stephen A.

The macroeconomics of delayed exchange-rate unification : theory and evidence from Tanzania (English). Policy, Research working paper ; no. WPS 2060 Washington, D.C. : World Bank Group. http://documents.worldbank.org/curated/en/172871468777601318/The-macroeconomics-of-delayed-exchange-rate-unification-theory-and-evidence-from-Tanzania