Money and Other Determinants of Inflation: The Case of Tanzania
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Date
2010
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Abstract
This paper seeks to establish the relative importance of money and other factors in
explaining inflation in Tanzania. The analysis was based on quarterly data for the
1967 – 2005 period. Both long run regression results failed to establish existence of
positive one-to-one correspondence between growth rates of three monetary
aggregates (M1, M2, M0) and (headline) inflation in Tanzania. The lack of the
one-to-one correspondence as predicted by the Quantity Theory of money also
emerged form estimated dynamic autoregressive distributed lag (ADL) error
correction model (ECM). Instead, other factors, particularly growth in real income,
were found to exert the expected depressive influence on inflation. This finding
underscores the importance of the demand for money in explaining inflation. Other
important structural factors found to influence inflation in Tanzania include
nominal exchange rate and inflation inertia. In aggregate the long run influence of
changes in money was found to be very small if compared to that exerted by
structural factors. This suggests limitations to monetary policy and importance of
structural factor in explaining the dynamics of inflation in Tanzania. On account
of theoretical controversies and innovations that have characterized inflation theory
to-date coupled with methodological issues of interest, more research on
inflationary process in Tanzania is called for to anchor or better the results of this
paper.
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Keywords
Inflation, Monetary Policy, Econometrics, Developing countries
Citation
Ndanshau, M.O., 2010. Money and other determinants of inflation: the case of Tanzania. Indian Journal of Economics and Business, 9(3), pp.503-545.