Budget Deficits, Money Supply and Inflation in Tanzania: A Multivariate Granger Causality Test, 1967–2010
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Date
2012
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Abstract
This paper investigates empirically the nexus between budget deficits, money supply and
inflation in Tanzania by employing data for the period 1967 – 2010. Pair-wise Granger
causality test established a one-way causal effect, running from inflation to budget deficit
and the monetary base. These findings were supported by results from the Vector Error
correction model (VECM) estimated. It is shown that there exist a significant inflation inertia
and causal effect on budget deficit over the short-run. The VECM results showed that shift in
monetary policy regime exerted a significant effect on inflation and budget deficits.
Innovation of the ratio of budget deficit to money balances as alternatives for the traditional
budget deficit to income ratio was found to lack significant effect on the results. Results are
very indicative but highlight the importance of containing inflation to check its effect on
budget deficits over the short-to long-run periods. The results also suggest that robust
econometric results can be obtained by deflating budget deficits by monetary aggregates or
income.
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Keywords
Inflation, Fiscal deficits, Money supply, Granger causality, Vector error correction model
Citation
Ndanshau, M.O., 2012. Budget Deficits, Money Supply and Inflation in Tanzania: A Multivariate Granger Causality Test, 1967–2010. University of Dar es Salaam Working Paper, (04/12). Vancouver