BUDGET DEFICIT AND INFLATION IN TANZANIA: ARDL BOUND TEST APPROACH

Abstract

Purpose -  The study aimed at analyzing the existence of the long run relationship between the government budget deficits and inflation in Tanzania.

Methodology - We used annual time series data for the budget deficit and inflation from 1970 to 2015 sourced from International Monetary Fund (IMF) database.  Autoregressive Distributed Lag (ARDL) bound test approach Pesaran and Shin (2001) was used.

Findings-  Our results revealed the positive relationship and existence of the long-run relationship between budget deficits and inflation. The coefficient of the speed of adjustment is significant at 5 percent; the whole system can get back to the equilibrium at the speed of adjustment of 72% towards a long run.

Conclusion- We suggest the government to adopt measures that would reduce the large budget deficit that has been growing over time. This would be one of the necessary conditions in reducing inflation over time and thereby the high economic growth witnessed can be sustainable.

Keywords

• ARDL model,budget deficit,Inflation,long run,Tanzania

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