Can money targets still anchor inflation in Tanzania? New Paper

Tanzania, along with all the other countries in the East African Community (EAC), seeks to anchor inflation by targeting the growth in the money supply. In recent years such frameworks have become less effective as structural change and financial innovation have made it increasingly difficult to identify a sufficiently stable demand for money function.

In a new paper, Christopher S. Adam (Oxford University and IGC), Pantaleo J. Kessy (Bank of Tanzania and IGC), Johnson J. Nyella (Bank of Tanzania) and Stephen A. O‟Connell (Swarthmore and IGC) develop an econometric model of the demand for broad money in Tanzania which explicitly models the process of structural change in Tanzania since the major economic and financial reforms of the mid-1990s. They show how this model both explains anomalies in the recent monetary history of Tanzania and improves on the forecast accuracy of velocity projections underpinning the Bank of Tanzania’s policy framework. The authors conclude that broad money targeting remains a valid basis for the conduct of monetary policy in Tanzania as it and its EAC partners move towards full-fledged inflation targeting regimes over the coming years.

This paper is the outcome of research collaboration between staff of the Bank of Tanzania and the IGC and can be accessed in the 'Publications' and 'Policy' sections.