An Assessment on Relationship between inflation and Economic Growth of Tanzania
Abstract
Description
The Dissertation submitted in partial fulfilment of the requirements
for awards of degree of Masters of Science in Finance and Accounting
(MSc. A and F) of the Mzumbe University
The study on the relationship between economic growth and inflation has attracted attention from both researchers and policy makers. A high and sustained economic growth with low and stable inflation is the central objective of most policy makers. The main purpose of this study is to ascertain the nature of the relationship between inflation and economic growth in Tanzania. In doing so, the study seeks to unravel the short-run and long-run dynamics between inflation and economic growth and establishing the nature of causality. The study reviews both theoretical and empirical aspects of inflation-economic growth relationship. Time series analysis involvingstationarity tests, co-integration tests, Granger causality tests and vector autoregressive analysis (VAR) are employed. The second logarithmic differences of Consumer Price Index(CPI) is used to measure inflation and the second logarithmic differences of real GDP per capita as a measure of economic growth to examine the relationship. The study covers a period from 1990 to 2013 and the data used are annual time series. The study finds no co-integration between inflation and economic growth. The nonexistence of co-integration implies that there is no stable long-run equilibrium relationship between inflation and economic growth. However, the VAR analysis reveals that inflation lags of three is significantly and negatively impacts economic growth in the short-run with coefficient of -0.1487736. The study further reveals that there is directional Granger causality between inflation and economic growth. The study concludes that inflation has a negative relationship with economic growth as well as with capital accumulation.Therefore, the Tanzania economic policy should focus on stabilizing the inflation rate which would bring and maintains optimal economic growth together with Capital Accumulation.
The study on the relationship between economic growth and inflation has attracted attention from both researchers and policy makers. A high and sustained economic growth with low and stable inflation is the central objective of most policy makers. The main purpose of this study is to ascertain the nature of the relationship between inflation and economic growth in Tanzania. In doing so, the study seeks to unravel the short-run and long-run dynamics between inflation and economic growth and establishing the nature of causality. The study reviews both theoretical and empirical aspects of inflation-economic growth relationship. Time series analysis involvingstationarity tests, co-integration tests, Granger causality tests and vector autoregressive analysis (VAR) are employed. The second logarithmic differences of Consumer Price Index(CPI) is used to measure inflation and the second logarithmic differences of real GDP per capita as a measure of economic growth to examine the relationship. The study covers a period from 1990 to 2013 and the data used are annual time series. The study finds no co-integration between inflation and economic growth. The nonexistence of co-integration implies that there is no stable long-run equilibrium relationship between inflation and economic growth. However, the VAR analysis reveals that inflation lags of three is significantly and negatively impacts economic growth in the short-run with coefficient of -0.1487736. The study further reveals that there is directional Granger causality between inflation and economic growth. The study concludes that inflation has a negative relationship with economic growth as well as with capital accumulation.Therefore, the Tanzania economic policy should focus on stabilizing the inflation rate which would bring and maintains optimal economic growth together with Capital Accumulation.
Keywords
Inflation, Economic Growth