the first three months and shows that the adjustment exceeds two thirds in only one market (Bukoba), but exceeds 50 percent in another seven markets. The median adjustment across all markets is 0.40. Of the markets that adjust more quickly to external price shocks, some represent surplus and some represent deficit regions, but most are either close to Nairobi (Bukoba and Musoma) or have access to a port (Tanga and Mtwara) - suggesting that geography plays a key role in the price adjustment process. The importance of geographic features in explaining market behaviour is consistent with a growing literature on the determinants of spatial differences in food prices. Several studies, including Versailles (2012) and Brenton et al. (2014), find significant border effects as well as large trade costs across space.

We also control for changes in fuel prices and the consumer price index. Although the cost of energy is expected to be captured by fluctuation in the external maize price, the large distances among Tanzanian markets make it likely that domestic fuel prices also play a role in domestic price determination.<sup>19</sup> We find that the effect of changes in fuel costs is mixed. In contrast to coastal markets and food surplus markets, food deficit markets that are in the interior are typically influenced by changes in fuel prices. Market prices in Dodoma and Morogoro, both in Tanzania’s interior and with reasonable road connectivity, are the most sensitive to changes in fuel prices. In addition, Musoma, Mwanza, and Moshi are also influenced by changes in fuel prices in the short run.

The inclusion of the Consumer Price Index (CPI) to control for inflation ensures that the influences of the other drivers do not merely reflect co-movement due to general inflationary pressures.<sup>20</sup> The CPI parameter estimate is statistically different from zero in several markets. Maize prices are more strongly associated with inflation in the Northern, Lake, and Central zones, and less so, or not at all, in the Southern and Coastal zones.

> in n periods. In the current period, _n_ = 0, _k_ takes the value of _γ_ 2 [also equal to 1 _−_ (1 _− γ_ 2)] which is the short-run effect of the external price on the domestic price. In the next period, _n_ = 1, _k_ takes the value of _γ_ 2 + (1 _− γ_ 2) _γ_ 1, which is the effect of the previous period, _γ_ 2, plus the feedback effect, (1 _− γ_ 2) _γ_ 1. It can also be written as (1 _−_ (1 _− γ_ 2)(1 _− γ_ 1) _γ_ 1. For _n_ = 2, _k_ takes the value of the previous period, [ _γ_ 2 + (1 _− γ_ 2)] _γ_ 1, plus _γ_ 1(1 _− γ_ 2 _−_ (1 _− γ_ 1) _γ_ 2) [which can be written as 1 _−_ (1 _− γ_ 2)(1 _− γ_ 1)<sup>2</sup> ]. The terms of the second parenthesis form a geometric sequence with the ratio equal to (1 _− γ_ 1) and the nth term equal to (1 _− γ_ 1)<sup>_n_</sup> . Hence, the adjustment at period n will be given by _k_ = 1 _−_ (1 _− γ_ 2)(1 _− γ_ 1)<sup>_n_</sup> . Figures 8 and 9 report the three-month cumulative adjustment with Nairobi and the US Gulf, respectively, i.e., _n_ = 2. For _k_ = 0.5, _n_ gives the half-life of a shock.

- 19We also examined whether world crude oil prices influence the domestic fuel prices. While we find that the world fuel price and the Dar es Salaam fuel price are cointegrated, the short-run magnitude of the external influence is quantitatively small. In the short run, a 10 percent increase in global crude prices is associated with a 0.9 percent increase in the local fuel prices in Dar es Salaam. After 3 months, just 35 percent of the shock is dissipated. Consequently, even after considering the impact of global crude price changes, we conclude that global commodity markets still exert a weak short-run influence on domestic markets in Tanzania.

> 20We also estimated the specifications by deflating all prices with the CPI, and the results are quantitatively very similar.

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