Effects of Government Debt on Monetary Policy Strategy in Tanzani

Abstract

This paper examines the fiscal dominance hypothesis in Tanzania by exploring the relationship between the monetary base and the government debt using monthly data from 2003:1 to 2019:12. Results from formal statistical tests indicate no evidence of a long-run relationship between the variables. Structural vector autoregressive model is thus estimated to analyse the short-run dynamics. The findings point to a positive and statistically significant impact of government debt on monetary base. The findings identifies political phenomenon that before the fourth phase government (2003-2005), monetary policy witnessed relatively intensive fiscal dominance as compared to the fourth phase (2005- 2015) and fifth phase government (2015-2019). However, in comparison with the fourth phase government, findings suggest that during the first four years of the fifth phase government, monetary policy encountered a relatively high fiscal influence, partly attributed to implementation of huge development projects and reduction in foreign financing in the government budget. The identified fiscal dominance for the sample period, implies a subordinated monetary policy, compromising on Bank of Tanzania’s primary objective of price stability.