The influence of regional integration on inflation volatility: Evidence from Tanzania in the East African community (EAC)

Abstract

This study examines how East African Community (EAC) regional integration influences inflation volatility in Tanzania. The study uses the Autoregressive Conditional Heteroskedastic (ARCH) and Generalised Autoregressive Conditional Heteroskedastic (GARCH) family of models to describe the conditional variance dynamics. It is guided by Optimum Currency Area (OCA) theory, which suggests that sharing a currency decreases inflation volatility through policy coordination by increasing shock absorption due to labour and capital mobility and requiring symmetry among economic partners. Employing quarterly time-series data over critical integration periods, including the attainment of the Customs Union in 2005 and the Common Market in 2010, the findings show that regional integration reduces inflation volatility by encouraging trade convergence, improving monetary coordination, and strengthening expectation anchors. Under the Exponential Generalised Autoregressive Conditional Heteroskedasticity (EGARCH) specifications, the estimated asymmetry and persistence parameters were found to be statistically significant, with integration reforms accounting for approximately 79% of quarterly volatility carryover. After 2005, mean-stable inflation with an average of around 1% characterises Tanzania, in contrast to persistently high inflation. However, post-reform turbulence and clustering of volatility point towards the risk of external shocks as a vulnerability for emerging markets aligned with commodity shocks. The results support the conclusions from the optimum currency area (OCA) theory, suggesting that integration fosters convergence and stabilisation, while revealing structural asymmetries such as the agrarian reliance on Tanzania and manufacturers’ tilt of Kenya, which are magnets for uneven volatility among member states. The policy implications of these findings advocate for the rapid operationalisation of the EAC Monetary Union, stronger fiscal surveillance, trade diversification, and the increased sophistication of econometric frameworks. Through enhanced integration that also tackles structural weaknesses, Tanzania and the EAC can create an environment in which inflation variability is a controllable risk rather than an insurmountable barrier to continued economic expansion. Building on these implications, this study recommends strengthening regional stabilisation mechanisms, such as dedicated stabilisation funds; enhancing agricultural productivity to reduce food price volatility; and deepening financial market development to improve monetary transmission. In addition, investing in cross-border infrastructure supports supply chain resilience, and adopting joint inflation-forecasting frameworks enables policymakers to anticipate and mitigate external shocks. Collectively, these measures will reinforce the foundations of integration and culminate in a successful monetary union (MU).