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

Author

Listed:
  • Kaufmann, Daniel
  • O'Connell, Stephen A.
Abstract
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 macroeconomicrole 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.

Suggested Citation

  • Kaufmann, Daniel & O'Connell, Stephen A., 1999. "The macroeconomics of delayed exchange-rate unification : theory and evidence from Tanzania," Policy Research Working Paper Series 2060, The World Bank.
    • Handle: RePEc:wbk:wbrwps:2060
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    References listed on IDEAS

    as
    1. Morris, Stephen, 1995. "Inflation dynamics and the parallel market for foreign exchange," Journal of Development Economics, Elsevier, vol. 46(2), pages 295-316, April.
    2. Obstfeld, Maurice, 1986. "Capital controls, the dual exchange rate, and devaluation," Journal of International Economics, Elsevier, vol. 20(1-2), pages 1-20, February.
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    4. Christopher Adam & Benno Ndulu & Nii Sowa, 1996. "Liberalisation and Seigniorage revenue in Kenya, Ghana and Tanzania," Journal of Development Studies, Taylor & Francis Journals, vol. 32(4), pages 531-553.
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    6. Joyce Sherwood, 1956. "Revenue Features of Multiple Exchange Rate Systems: Some Case Studies," IMF Staff Papers, Palgrave Macmillan, vol. 5(1), pages 74-107, February.
    7. Pinto, Brian, 1989. "Black Market Premia, Exchange Rate Unification, and Inflation in Sub-Saharan Africa," The World Bank Economic Review, World Bank, vol. 3(3), pages 321-338, September.
    8. Easterly, William R & Mauro, Paolo & Schmidt-Hebbel, Klaus, 1995. "Money Demand and Seigniorage-Maximizing Inflation," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(2), pages 583-603, May.
    9. Rudiger Dornbusch, 1986. "Multiple Exchange Rates for Commercial Transactions," NBER Chapters, in: Economic Adjustment and Exchange Rates in Developing Countries, pages 143-174, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Ozili, Peterson K, 2024. "Exchange Rate Unification in Nigeria: Benefits and Implications," MPRA Paper 120441, University Library of Munich, Germany.
    2. Government of the United Republic of Tanzania & World Bank, 2002. "Tanzania at the Turn of the Century : Background Papers and Statistics," World Bank Publications - Books, The World Bank Group, number 14054.

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