Navigating Economic Ripples: How Real Exchange Rate Volatility Shapes Real Gross Domestic Product with Evidence from Tanzania.

This article investigates the effects of the real exchange rate on real gross domestic product (GDP) in Tanzania from 1964 to 2019. Using the Gregory–Hansen co-integration test, vector error correction models, and Granger causality tests, the study finds a long-run negative relationship whereby a 1% appreciation of the Tanzanian shilling against the US dollar reduces real GDP by approximately 0.13%, with a smaller short-run effect of 0.01%. Merchandise exports positively influence GDP, while inflation negatively affects it, and the exchange rate impacts GDP primarily through export and inflation channels. The Granger causality test indicates unidirectional causality from GDP growth to the exchange rate, suggesting that economic growth influences exchange rate movements rather than the reverse. The study highlights the importance of stabilizing the exchange rate, targeting inflation, enhancing productive capacity, and promoting export-led growth for Tanzania's economic development.