Monetary Policy in a Small Open Partially Dollarized African Economy

Abstract

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