The Budget Deficits and Inflation in Tanzania: A causal relationship

Mmbaga, Niwael (2013) The Budget Deficits and Inflation in Tanzania: A causal relationship. Masters thesis, The Open University of Tanzania.

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Abstract

The existing high levels of inflation along with budget deficits in Tanzania have created great concern among analysts and policy makers. The study attempts to investigate the nature and direction of causality between inflation and budget deficits in Tanzania for the period between 1975 and 2010. The analysis was based on secondary annual time series data. Stationarity test using Augmented Dickey-Fuller (ADF) was carried out to examine the stationarity of the variables used in the study. It is proved that the variables were stationary, though not in levels but in first differences. The study employs a cointegration and error correction model (ECM) technique in examining the existence of long-run relationship among the variables. All variables involved are integrated of order one while the error correction model estimates indicate the existence of a long-run relationship between inflation and budget deficits. Granger causality pair-wise test was conducted in determining the causal relationship among the variables. The results showed that there was no causal relationship running from inflation to budget deficit, while the causal relationship from budget deficit to inflation was significant. This implies that a uni-directional causality from budget deficit to inflation existed in Tanzania, during the period under study. On the policy area, the government has to take purposeful measures to alleviate the problem through pursuing consistent monetary and fiscal policies.

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