Monetary Policy in a Small Open Partially Dollarized African Economy

Abstract

The study uses a Dynamic Stochastic General Equilibrium to describe the conduct ofmonetary policy in a small, open, and partially dollarized Tanzanian economy. Thestructure of the model incorporates the expectations of agents and the dynamicrelationships are explained in terms of structural representations that characterize thebehaviour of the firm, household and central bank. The model incorporates severalconditions that are consistent with most modern new Keynesian models in that itallows for a number of nominal and real rigidities. The parameters in the model areestimated with Bayesian techniques, after it has been applied to Tanzanian data. Theeffects of individual shocks, including those that may be used to describe the conduct of monetary policy, are then considered. These simulations suggest that despite theexistence of partial dollarization in the Tanzanian economy, monetary policy hasimportant, short-term, real effects.