Towards Price Stability in Tanzania During Economic Reforms: Does Fiscal Discipline Matter?

Abstract

This study attempts to establish empirically the extent to which prudent fiscal policy of the government in Tanzania accounted for successful containment of inflation during the period 1980-2010. The analysis, which is based on cointegration and error correction models (ECM) shows existence of a long-run relationship between inflation and its determinants, but over the short-run period budget deficits was an insignificant determinant of inflation in Tanzania. Empirical evidence could neither support the thesis that inflation aggravates budget deficits problems nor the thesis that budget deficits contribute to the expansion of money supply, at least in Tanzania. Instead, other factors account more for inflation dynamics in Tanzania: in particular, economic growth, depreciation of exchange rate, and price inertia. Importance of policies fiscal and monetary policies that guarantees stable exchange rate, attainment of sustainable rate of economic growth, and aversion of inflation inertia over the short-run period is underscored by the empirical results.