The Factors which influence exchange rate fluctuation to the economy of Tanzania

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