Abstract
This study investigated the nexus of crude oil price shocks and exchange rates of Tanzanian shillings (TSh) as an oil importing country. Using weekly series data for the period 01/01/2005 to 31/12/2015, Vector Autoregressive (VAR) model was employed to test the relationship of crude oil prices and Tanzanian exchange rates. In addition, Granger Causality was tested to check the causality of these two variables. The findings of this study show that oil prices granger causes the exchange rate of TSh while exchange rates of TSh cannot Granger cause the oil prices. Also, the impulse response functions revealed that crude oil price shocks initially had a significant negative effect on TSh, however, there was a slightly negative effect on crude oil starting from TSh as a granger causer. VAR results showed that all the coefficients of TSh do not significantly influence crude oil prices. Crude oil price coefficients had a negative significance towards explaining the variability of Tanzanian shillings’ exchange rates (TZS).This revealed that a change in oil prices would precede changes in TSh movements.
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