Does Public Debt Granger-Cause Inflation in Tanzania? A Multivariate Analysis

Talknice Saungweme and Nicholas Odhiambo

Economia Internazionale / International Economics, 2022, vol. 75, issue 1, 75-100

Abstract: The optimal balance between fiscal and monetary policy in achieving price stability has been contested in literature. In the main, however, it is widely recognised that whether public debts are financed in a monetary way or otherwise, the choice of policy action affects the effectiveness of monetary policy in ensuring price stability. This study contributes to the debate by testing the dynamic causal relationship between public debt and inflation in Tanzania covering the period 1970-2020. The study applies the ARDL bounds testing technique to cointegration and the ECM-based Granger-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 monetary variables, namely money supply and interest rate, were added as intermittent variables alongside public debt and inflation. The findings from this study show that there is a consistent long-run cointegrating relationship between public debt, inflation, money supply and interest rate in Tanzania. However, the results fail to find evidence of causality between public debt and inflation in Tanzania, irrespective of whether 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 to pursue the desirable fiscal policies necessary for the country’s long-term optimal growth path. Può il debito pubblico Granger-causare l’inflazione in Tanzania? Un’analisi multivariata Nella letteratura è generalmente riconosciuto che se il debito pubblico è finanziato in forma monetaria o altro, la scelta delle azioni politiche influisce sull’efficacia della politica monetaria nell’assicurare la stabilità dei prezzi. In questo studio viene applicata la tecnica ARDL alla cointegrazione e il test ECM di Granger-causalità. Per risolvere il problema dell’omissione di variabili sono state aggiunte due variabili monetarie, la domanda di moneta e il tasso di interesse. I risultati di questo studio mostrano che nel lungo periodo c’è una relazione costante di cointegrazione tra debito pubblico, inflazione, domanda di moneta e tasso di interesse in Tanzania. Però, i risultati non riscontrano evidenza della causalità tra debito pubblico e inflazione in Tanzania, indipendentemente se la causalità è stimata nel breve o nel lungo periodo. Quindi i risultati di questo studio mostrano che il debito pubblico della Tanzania non causa inflazione.

Keywords: Public Debt; Inflation; ARDL; Granger-Causality; Tanzania (search for similar items in EconPapers)
JEL-codes: C32 E31 H63 (search for similar items in EconPapers)
Date: 2022
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