Assessment of monetary policy transmission mechanism in Tanzania

Abstract

This study aims at assessing the effectiveness of alternative monetary policy transmission channels in Tanzania. Theoretically, the monetary policy transmission is expected to differ between developed and developing countries due to varied structural and institutional features. The empirical work undertaken by this study suggests that the sensitivity of output and prices to changes in monetary policy are generally weak and slow. Moreover, the study found a significant contribution of monetary policy in explaining dynamics of supply of credit to private sector which matters in fostering the growth of the economy. And lastly, it appears that inflation and exchange rate dynamics in Tanzania are highly influenced by developments in the international oil prices. There are potentially three policy implications, the first one being sustaining financial sector reforms geared towards eliminating the remaining structural impediments that hinder financial deepening, the Bank may choose to switch to an alternative monetary policy framework that has proved to be successful in attaining price stability, the Bank of Tanzania should continue with close monitoring of the global developments especially the movements in the international oil prices and react appropriately in order to safeguard the domestic macroeconomic stability.