The effectiveness of foreign exchange market intervention in Tanzania: an empirical assessment

Abstract

This paper investigates the impact of central bank intervention on the level and volatility of the exchange rate in Tanzania. The paper first endeavours to test whether or not foreign exchange market interventions by the Bank of Tanzania are sterilized. This question is addressed by running a standard regression on base money to see if the changes in the Net Foreign Assets of the Bank of Tanzania systematically affect the monetary base. The results indicate that there is some evidence of sterilization of foreign exchange market intervention in Tanzania. Overall the empirical evidence suggests that foreign exchange intervention in Tanzania may have not been effective in reducing exchange rate fluctuations. In the light of these findings, we argue that the central Bank of Tanzania may need to reassess its intervention strategy, particularly the timing and the magnitude of the interventions.