The Effects of Macroeconomic variables on Economic growth in Tanzania:1980 - 2020

Kihwele, Steven (2022) The Effects of Macroeconomic variables on Economic growth in Tanzania:1980 - 2020. Masters thesis, The Open University of Tanzania.

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Abstract

The main purpose of this dissertation work is to scrutinize the effects of macroeconomic variables on economic growth in Tanzania. The study is carried out using annual time series data covering a period of 1980 to 2020. Ordinary Least Square (OLS), Error Correction Models (ECM) and Granger Causality Test have been used to determine the impact of macroeconomic variables on economic growth. Also, the dynamic correlations and innovations of macroeconomic variables and economic growth have been intuitively analysed by undertaking the impulse response function (IRF). OLS results show that economic growth of Tanzania is positively and significant influenced by inflation rate, real exchange rate and government expenditure. Also, the significance of Augmented Dickey-Fuller (ADF) for regression residuals demonstrate an existence of long run relationship among variable. ECM results also ignites the influence of money supply and RER on economic growth in the short run, and significant equilibrium restoration in general. The IRF innovation results suggest that, the policy variables inflation rate, money supply, real exchange rate, trade openness and government expenditure have significant impact on economic growth in Tanzania specifically in the long run, thus some time with lag. Although, as a priori monetary and fiscal policy variables do have a dominant effect on economic activity of any country, this study clearly shows that economic growth in Tanzania is dominated by its own dynamics in most of the periods. Thus, the study recommends right policy mix given the dynamics would have significant impact to the economic growth in Tanzania. Keywords: Economic growth, Macroeconomic variables, ECM, Granger Causality, Impulse Response Function.

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