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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. |
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