Impact of fiscal policy on the real exchange rate: anecdotal evidence from Tanzania

Abstract

In macroeconomic theory of open econimies, it is argued that an adverse fiscal imbalance results into a higher real interest rate. In turn the higher real interest rate reduces net foreign investment and that this leads to an appreciation of the domestic currency. This study is a preliminary empirical investigation of the extent to which the budget deficit inTanzania has had any relationship with the real interest rate and the real exchange rate.