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.