Li, YingRowe, Francis2012-06-082012-06-082007-12https://hdl.handle.net/10986/7514Tanzania is well placed to receive a significant increase in aid inflows in coming years. Despite the potential for the additional aid inflows to raise income levels in the country, increasing them may bring about structural changes in the economy that may be unwelcome. One such change is an appreciation of the real exchange rate that leads to a contraction of traditional export sectors and a loss of export competitiveness. This paper employs a reduced-form equilibrium real exchange rate approach to explain movements in Tanzania's real effective exchange in recent decades. Particular attention is paid to the relationship between aid inflows and the real effective exchange rate. The authors find that the long-run behavior of the real effective exchange rate is influenced by terms of trade movements, the government's trade liberalization efforts, and aid inflows. Positive terms-of-trade movements are associated with an appreciation, periods of improving trade liberalization are associated with a depreciation, and increases in aid inflows are associated with a depreciation in the real effective exchange rate. Although the last result is non-standard, it is not empirically unique and does have theoretical underpinnings. A detailed analysis of this relationship over the last decade shows that the Bank of Tanzania's response to aid inflows is likely the main reason for the finding.CC BY 3.0 IGOACCUMULATION OF RESERVESAGGREGATE DEMANDBALANCE OF PAYMENTSBALANCE OF PAYMENTS CRISESBALANCE OF PAYMENTS CRISISBILATERAL EXCHANGE RATESBILATERAL TRADEBILLBLACK MARKETCAPITAL ACCOUNTCAPITAL FLOWSCAPITAL INFLOWSCAPITAL MARKETCASH FLOWCENTRAL BANKCHOW TESTCOMMODITY PRICECOMMODITY PRICESCOMPETITIVE DEVALUATIONCONSUMER PRICE INFLATIONCONSUMPTION EXPENDITURESCORRELATION COEFFICIENTCURRENT ACCOUNTCURRENT ACCOUNT BALANCECURRENT ACCOUNT DEFICITCUSTOMS DUTIESDEBTDEBT RELIEFDEBT SERVICEDECLINE IN INFLATIONDEPRECIATIONDEPRECIATIONSDEVALUATIONDEVALUATIONSDIRECTION OF TRADEDISCOUNT RATEDOMESTIC CREDITDOMESTIC CURRENCYDOMESTIC CURRENCY PRICEDOMESTIC DEMANDDOMESTIC ECONOMYDOMESTIC GOODSDOMESTIC INTEREST RATESDOMESTIC PRICESDUTCH DISEASEECONOMIC POLICYEQUILIBRIUMEQUILIBRIUM LEVELERROR CORRECTION MODELERROR CORRECTION TERMERROR TERMEXCHANGE RATE MISALIGNMENTEXCHANGE RATE POLICYEXCHANGE RATE REGIMEEXCHANGE RATE REGIMESEXCHANGE RATESEXPLANATORY VARIABLEEXPLANATORY VARIABLESEXPORT COMPETITIVENESSEXPORT EARNINGSEXPORT MARKETSEXPORT PERFORMANCEEXPORT REVENUESEXPORTEREXTERNAL BALANCEEXTERNAL COMPETITIVENESSEXTERNAL EQUILIBRIUMEXTERNAL FACTORSFISCAL DEFICITFISCAL IMBALANCESFISCAL POLICYFIXED EXCHANGE RATEFIXED EXCHANGE RATE REGIMEFIXED RATEFIXED RATE REGIMEFLEXIBLE EXCHANGE RATEFLEXIBLE EXCHANGE RATE REGIMEFOREIGN CURRENCYFOREIGN EXCHANGEFOREIGN EXCHANGE MARKETFOREIGN EXCHANGE MARKETSFOREIGN PRICE LEVELSFRANC ZONEFUNDAMENTAL DETERMINANTFUTURESGENERAL EQUILIBRIUMGLOBALIZATIONGOLDGOVERNMENT BORROWINGGROWTH RATEGROWTH RATESIMBALANCESIMPORTIMPORT CONTENTIMPORT LIBERALIZATIONIMPORT LICENSINGIMPORT PRICESIMPORT TARIFFSIMPORTSINCOME LEVELSINSTRUMENTAL VARIABLEINTERNATIONAL BANKINTERNATIONAL CAPITAL FLOWSINTERNATIONAL COMPETITIVENESSINTERNATIONAL MARKETINTERNATIONAL PRICEINTERNATIONAL PRICESINTERNATIONAL RESERVESINTERNATIONAL TRADEINVESTMENT RATEINVESTMENT RATESINVESTMENT SPENDINGLIQUIDITYLOCAL CURRENCYLONG ­RUN EQUILIBRIUMLONG-RUN EQUILIBRIUMLONG-TERM EQUILIBRIUMLOSS OF COMPETITIVENESSLOW-INCOME COUNTRIESLOW-INCOME COUNTRYMACROECONOMIC CONDITIONSMACROECONOMIC MODELSMACROECONOMIC REFORMSMACROECONOMIC STABILITYMACROECONOMIC STABILIZATIONMACROECONOMIC VARIABLESMARKET SHAREMISALIGNMENTMISALIGNMENTSMONETARY DETERMINANTSMONETARY POLICYMONEY SUPPLYNOMINAL DEPRECIATIONNOMINAL EXCHANGE RATENOMINAL EXCHANGE RATESOIL PRICESOPEN ECONOMYOUTPUT GAPOVERVALUATIONPARALLEL EXCHANGE RATEPARALLEL EXCHANGE RATESPARALLEL MARKETPARALLEL MARKET RATEPARALLEL MARKETSPARALLEL NOMINAL EXCHANGE RATEPOST-CRISIS PERIODPOVERTY REDUCTIONPRICE COMPETITIVENESSPRICE INDEXPRICE INDICESPRIMARY COMMODITIESPRIMARY COMMODITYPRIVATE CAPITALPUBLIC EXPENDITUREPUBLIC EXPENDITURESPUBLIC INVESTMENTPUBLIC SPENDINGPURCHASING POWER PARITYREAL APPRECIATIONREAL DEPRECIATIONREAL EFFECTIVE EXCHANGE RATEREAL EFFECTIVE EXCHANGE RATESREAL EXCHANGE RATEREAL EXCHANGE RATE APPRECIATIONREAL EXCHANGE RATE BEHAVIORREAL EXCHANGE RATESREGIME CHANGESRELATIVE DOMESTIC PRICERELATIVE PRICERELATIVE PRICESRESERVE ACCUMULATIONRESERVE BANKROBUSTNESS CHECKSSHORTFALLSSPEED OF ADJUSTMENTSTRUCTURAL REFORMSTRUCTURAL REFORMSSUM OF IMPORTSSUPPLY RESPONSESUPPLY SIDESUPPLY-SIDESUSTAINABLE CAPITALT-BILLSTAXTAX INCREASESTRADABLE GOODSTRADE DEFICITTRADE LIBERALIZATIONTRADE MOVEMENTSTRADE REGIMETRADE SHARESTRADE STATISTICSTRADINGTRADING PARTNERSTREASURY BILLSUNCERTAINTYUPWARD PRESSUREWEIGHTSWHOLESALE PRICE INDICESWORLD MARKETSWORLD PRICEWorld Bank10.1596/1813-9450-4456