Abstract:
This study examined the factors which influence exchange rate fluctuation to the economy of
Tanzania. The study used time series data specifically gathered from Bank of Tanzania (BOT)
and National Bureau of Statistics (NBS). The time scope covered from 1970 – 2015. The study
covered the foreign direct investment (FDI), interest rate (INT), inflation rate (INF) and gross
domestic product (GDP). The main objective of the study was to determine whether exchange
rate fluctuation had a significant impact to the economy of Tanzania. By using multiple linear
regression analysis revealed that gross domestic product, interest rate and inflation rate were
statistically significant while foreign direct investment were statistically insignificant influence
exchange rate to fluctuate given the model. Therefore the study concluded that there was no
significant impact of foreign direct investment on exchange rate. However, there was a positive
and significant impact of exchange rate on interest rate and gross domestic product and negative
on inflation rate. For Tanzania the need for maintaining external competitiveness and promoting
growth remains a delicate tasks for policymaker as it involves managing an exchange rate regime
accompanied by other consistent macroeconomic policy. The study recommended that
Tanzania government must make sure that interest rate, gross domestic product and inflation in
order to realize better exchange rate as indicated in the regression equation. Augmented dickey
fuller unit root test, Heteroscedasticity test were conducted to test for stationary data used and
heteroscedasticity.
Keywords: Multiple regression, interest rate, gross domestic product, inflation rate, foreign direct
investment and exchange rate
