Developing a forecasting and policy analysis system for Tanzania

The aim of this project is to provide technical support to the Research Department of the Bank of Tanzania (BoT) with their development of a new modelling tool, the Forecasting and Policy Analysis System (FPAS).  The FPAS is being designed to assist the BoT in the formulation and implementation of monetary policy as it makes the transition from a monetary policy framework, anchored by targets for the money supply, to one in which interest rates are used to signal the monetary authority’s policy stance.

One of the research team’s aims is to increase the capacity of the Research Department by providing their policy-making processes with the most up-to-date empirically tested economic theory.  Objectively, this will mean the specification and estimation of aspects of the FPAS model, specifically the processes driving inflation and the exchange rate in Tanzania.

In this project, the econometric analysis of these two model components is re-examined. Also, the implications for the overall performance of the FPAS will be evaluated. Doing so will strengthen the BoT’s technical ability in formulating and implementing coherent evidence-based monetary policy. This is an essential element in delivering the macroeconomic stability that underpins sustainable growth in Tanzania.

This is a quantitative research project.  The key equations in the FPAS model will be re-estimated by the researchers via data supplied by the BoT Research Department. The research team will then use this econometric evidence to calibrate the forecasting model, and perform sensitivity analysis on the model in order to make it more robust. A variety of time series econometrics and analytical modelling techniques will be employed.

The conclusions and policy implications of this project will be written up as a technical report for the Research Department.