Does public debt granger-cause inflation? A multivariate analysis

Talknice Saungweme and Nicholas Odhiambo

No 28342, Working Papers from University of South Africa, Department of Economics

Abstract: The optimal balance between fiscal and monetary policy in achieving price stability has been contestedin literature. In the main, however, it is widely recognised that whether public debts are financed in amonetary way or otherwise, the choice of policy action affects the effectiveness of monetary policy inensuring price stability. This study contributes to the debate by testing the dynamic causal relationshipbetween public debt and inflation in Tanzania covering the period 1970-2020. The study applies theautoregressive distributed lag (ARDL) bounds testing technique to cointegration and the ECM-basedGranger-causality test to explore this relationship. In order to address the omission-of-variable bias,which has been the major methodological deficiency detected in some previous studies, two monetaryvariables, namely money supply and interest rate, were added as intermittent variables alongside publicdebt and inflation. The findings from this study show that there is a consistent long-run cointegratingrelationship between public debt, inflation, money supply and interest rate in Tanzania. However, theresults fail to find evidence of causality between public debt and inflation in Tanzania, irrespective ofwhether the causality is estimated in the short run or in the long run. The findings of this study,therefore, show that Tanzania?s current debt is not inflationary; hence, policymakers may continue topursue the desirable fiscal policies necessary for the country?s long-term optimal growth path.

Keywords: Public debt; inflation; ARDL; Granger-causality; Tanzania (search for similar items in EconPapers)
Date: 2021-11
New Economics Papers: this item is included in nep-ban, nep-cba, nep-mac and nep-mon
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