Mkemwa, Neema Ernest
(2017)
The Impact of Fiscal Policy, Interest Rate and Inflation on Private Consumption in Tanzania: 1972-2014.
Masters thesis, The Open University of Tanzania.
Abstract
Private consumption is one of the important components of aggregate demand contributing about two third of the gross domestic product. This study investigates the impacts of fiscal policy reforms, interest rate and inflation rate on private consumption in Tanzania so as assess the people’ standard of living from 1972-2014. The study used cointegration approach and the Autoregressive Distributive Lag Model (ARDL) estimated by OLS technique to analyse the dynamics of consumption behaviour in the country with secondary aggregate annual time series data from various sources. All explanatory variables namely real disposable income, real interest and inflation rate were statistically significant where income had a positive impact while the other two had a negative impact on consumption.Two periods lags were not statistically significant except for consumption and first lag of disposable income. The analysis also revealed real private consumption to have slightly increased and as a result even the standard of living has improved. The average growth rate of real per capita consumption for the whole period under investigation was only 2.8 percent whereby, it was at an average of negative 2 percent, 4.8 and 5.4 percent before,during, and after reforms respectively. The study recommended that in order to improve standard of living, the government should increase disposable income through reducing direct and indirect tax, subsidize or design welfare programmes for the most need society so as to increase their income. Efforts should be taken to control inflation so as to reduce its negative impacts on consumption and welfare and finally financial institutions should lower real interest which so as to improve consumption and hence improve households’
living standards.
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