Analysis of Monetary Policy Towards Correction of Balance of Payment Disequilibrium in Tanzania

Abstract

This study investigates the role of monetary policy in correcting balance of payment disequilibrium in Tanzania using time series data running from 1989 to 2022. The data were transformed to natural logarithms for linearity. Autoregressive Distributed Lag (ARDL) model, Unit root test, ARDL Bound cointegration test, and residual diagnostic tests were employed to analyse this data. The study revealed that only the inflation rate (CPI) was stationary at level, while the balance of payment (BoP), real effective exchange rate (REXR), money supply (MS), discount rate (DS), and domestic credit to private sector (DCPS) were stationary at their first differences. Further, ARDL showed that only REXR and MS have a long-run positive effect on the balance of payment (BoP), while other variables have short-run effects. The Error Correction Model (ECM) showed a speed of 40% adjustment of BoP each year. The study recommends that BoP disequilibrium should be corrected by appropriate monetary policy tools.